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Bank Credit Flows
By Raymond J. Doll and Gene L. Swackhamer

THE

FLOW OF bank credit is a vital part of
economic activity in a highly integrated
economy . The research which will be discus ed
here suggests considerable immobility in the
flow of such credit. Reasons for prevailing
rigidities include variation in state laws pertaining to such items as usury and legal loan
limits, managerial inertia of lenders, and perhaps the kind s of mechanisms used in making
bank credit available . Because of such ri gidi ti es, monetary policy authorities arc concern d both with making the proper amount
available and with its distribution. To the
exte nt that particular techniques can be varied
to optimize bank credit flows, attempts can
be made to use that combination of techniques
that will do the most effective and impartial
job.
In this article, an attempt is made to test for
rigidities in bank credit flows and to evaluate
their significance insofar as monetary policy
aut horiti es arc concerned. To minimize rigidit ies caused by such factors as legislation
and managerial inertia would require an intensive educational campaign and change in
legislation. All monetary policy authorities can
do to alleviate immobility caused by factors
such as these is to use that combination of
mechanisms that will tend to minimize the differentials that arise. To do this effectively,
policy authorities must be able to identify the
differentials and understand the linkage between the variou mechani ms u ed and credit
flows.
The quantity of bank reserves is influenced
directly by three kinds of activities - open
market operations, discounting, and float. The
proportions of total bank reserves made available in recent years by each activity are 95 per

Monthly Review • October 1968

cent through open market operations in which
the Open Market Committee takes the m1t1ative, I per cent through discounting in which
the individual member bank takes the initiative, and 4 per cent by float. In addition to
changing the quantity of bank reserves, the
Board of Governors of the Federal Reserve
System a lso can take action to change the level
of rese rve requirements . Such action docs not
itself affect th e amount of total member bank
reserve balances, but it docs affect the amount
of depos its and of loans and investment that
member banks can legally maintain on the
basis of a given amou nt of reserves.
If the economy were perfectly competitive,
arguments would strongly favor excl usive use
of the open market operation, since impersonal
market forces, rather than personal judgment,
would determine distribution of bank reserves.
Under the rigorous assu mptions underlying
perfectly competitive market , float would disappear and discount window administration
would be unncces ary. However, it should be
pointed out that, even in open market op rations, the judgment of the Open Market Committee must be relied upon for the decision as
to the total volume of reserves to be made
available.
Since the economy is not perfectly competitive, money markets do not function perfectly
as impersonal allocators of resources-including bank credit. Many examples of imperfection
could be cited in all ectors of the economy.
1

1
The assumptions underlying perfectly competitive markets
include complete and instantaneous mobility of resources,
perfect knowledge, and enough buyers and sellers so no
buyer or seller can have a noticeable influence on the
market.

3

Bank Credit Flow s

Some evidences of imperfections relating directly to bank credit markets include variability
among banks in: ( I ) their ability to use such
devices as the Federal funds and certificate of
depo it markets for obtaining and dispersing
bank credit, (2) rates paid on time and savings
deposits, (3) the ability to finance specific individual and busincs. s, and ( 4) their knowledge of, and access to, financial and other
market infom1ation. Other evidences of imperfections exi t, but those just cited point out that
a specific individual or business could have
more difficulty in obtaining credit than another
comparable individual or business because of
such factors .1s location and structur' and
kind of business. To the extent that ,iny pre v.iiling variability can be measured and traced
to imperfect markets, it behooves responsible
authorities to review prevailing market techniques and suggest revisions or adaptations
that will tend to compen ate for some of the
inequities. For example, discount admini tration at the Federal Reserve Banks could be
revised in an effort to adjust for market inequities, including cushioning the strains of reserve adjustment for individual member banks.
This article tests how well bank credit has
been distributed regionally to the agricultural
industry in the United tat s. The agricultural
sector is excellent for this type of analysis becau . c the regional impact of market imperfections is likely to be most severe in an industry
such as farming, which is composed of a large
number of relatively small, widely dispersed
firms that tend to be isolated. Furthermore, the
Agricultural Loan Survey of mid-1966 makes
da~ta available for developing a methodology
and testing for evidences of imperfections in the
farm credit market.
In this study, it is hypothesized that regional
variation in interest rates on agricultural loans
exceeds differences attributable to variability
in uncertainty and lending costs. Multiple
linear regression is used to relate borrower,
lending bank, loan, and market characteristics
4

to interest rates for similar type loans. 2 Alternative models arc tested for feeder livestock and
farm operating expense loans in order to identify those economic factors that best explain
rate variability.
In a perfectly competitive economy, interest
rates charged borrowers on comparable loans
would be the ame in all regjons. " Every seller
and purchaser of bank credit would have equal
and complete knowledge about, and access to,
bank credit markets. Interest rates charged
borrowers would differ primarily because of
variability in risk and other costs of making
loans. uch factors as lack of mobility in flow
of funds, diversity in usury laws, and man :tgcri,il inertia of lenders would not prevail,
since, if rates on comparable loans tended to
get out of line, with perfect knowledge and
freedom of access to all market , forces would
be implemented instantaneously that would
tend to reestablish equilibrium. Excess demand
in areas of rapid growth would be only temporary.
Fixed interest rates charged all customers
by a bank or other financial institution, regardless of variability in risk and other costs,
aL o indicates that the financial institutions do
not operate in a perfectly competitive environment. If all customers arc charged the same
rate, regardless of risk and other costs of making loans, some of the customers arc paying
more and others less than they would in a
competitive market. Credit, under these conditions, would not be optimally allocated, since
free market forces would not determine distribution of the credit. Instead, personal judgment of the allocators would determine how
credit was distributed.

~The methodol ogy u:-,cd and technical data arc included
in the appendix at the end of this article .
"The term "interest rates," as used in this study , will
refer to rates charged borrowers and will include the cost
of risk-bearing and other costs, in addition to the payment for use of funds or "pure interest,'' as the term is
frequently used by the economist.

Federal Reserve Bank of Kansas City

Bank Credit Flows

In this study, rates charged farmers by commercial banks were compared by Federal Reserve districts for feeder livestock and other
operating expense loans . A comparison also
was made by states for other operating expense
loans, since the size of sample, with the exception of a few states, was adequate for state
analysi on this type of loan . A large number
of factors- selected to measure the cost of
lending, local loan demand, the supply of
loanable funds, borrower risk, and market
competition - were examined in preliminary
tests to determine which had the greatest impact on rates charged farmers for the particular type of loan being evaluated. After these
factors were determined, rates were analyzed
for loans that were adjusted for comparability
by Federal Reserve di stricts for feeder livestock
loans and by Federal Reserve districts and
states for other operating expense loans.
By use of this procedure, it was possible to
determine average rates for each Federal Reserve district on feeder livestock loans made to
farmers with about the same gross dollar value
of sales and net worth, on notes of the same
size, made by banks of about the same size
and loan-to-deposit ratios. Rates charged were
then compared among Federal Reserve districts. Some Federal Re erve districts had very
few feeder livestock loans on which necessary
borrower information was available. Average
rates on other operating expense loans- adjusted for gross dollar value of sales, net
worth, size of note, size of bank making the
loan, loan-to-deposit ratio of the bank making
the loan, type of farming, and security-also
were computed by Federal Reserve districts.
Greater interest rate variability among states
than among Federal Reserve district for other
operating expense loans was expected for two
reason ·. First, most Federal Reserve districts
contain all, or part , of several states- resulting in the averaging out of much state variability. Second, there is substantial variability
among states in factors that influence financial
Monthly Review • October 1968

markets- such a usury laws, legislation pertaining to bank structure, legal loan limits, and
familiarity of bank management with agriculture.
Determining average interest rates by states,
adjusted for comparability by holding the influence of other economic variable constant,
is a huge ta k. Furthermore, such computations require a large computer and a large
sample of loans to provide a high degree of
significance for each state. Consequently, rates
were computed on operating expense loans exclusive of feeder livestock loans adjusted only
hy net worth of borrower, since this was the
most important variable influencing interest
rates other than region. Since the comparisons
were made on operating expense loans, which
generally have short maturities and arc adjusted for net worth of borrower, a high degree of comparability prevails.
REGIONAL VARIABILITY AS MEASURED
BY INTEREST RATES

Analysis of interest rate variability suggests
that impersonal market forces do not allocate
bank credit optimally among regions in the
prevailing economic environment. Regional
vc1riability prevailed consistently for both livestock and other operating expense loans by
Federal Reserve districts and states. Regional
differences were substantially more important
than any other measurable factor in explaining
interest rate variability.
Regional variation in interest rates on business and real estate loans has been identified
also. For example, a study of new house mortgage rates in Standard Metropolitan Statistical
Areas in 1963-64 reveaJed a range of 89 basis
points between the northeast low of 5.28 and
the West Coast high of 6.17:

•A. H . Schaaf, "Regional Differences in Mortgage Financing Costs," The Jo11mal of Finance, March 1966,
pp. 85-94.

5

Bank Credit Flows

A comparison of intere t
rates charged on feeder
livestock loans , adjusted
for the influence of other factors mentioned
previou ly, reveals su bstantial variability on
highly comparable loans among the different
Federal Rese rve districts. It is significant that
regio n, as mea u red by Federal Reserve di. trict, acco unted for 12 per cent of the total
variability in interest rates charged on such
loans. As indicated in Chart I, rates charged
on these hi gh ly comparable loans varied from
a low of 5.97 per cent in th e lcveland Distri ct to a hi gh of 7.4 1 per ce nt in the Dallas
Di strict. ;\ vailablc ev idence sug rests that r;1tes
on feeder livestock lo:1ns for th e Boston and
New York Di stri cts arc not co mparnblc . In the
ca. e of New York, 77 per cent of th e survey
loans was necessa rily excluded from the study
due to unreported information for several of
the factors being examined. Thus, the entire
figure for the ew York Di trict was expanded
on the basis of 4 1 loans on which rates were
substantially higher in relation to other farm
loans in other Federal Rese rve di stricts. Additionally, since Bosto n and cw York, combined, accounted for less than I per cent of all
feeder livestock loans in th e Nation , a few
hi gh- or low-rate loans in th ese di stricts could
ea sil y di . tort di. trict average rates . The ge neral
pattern was for rates to be relatively low in the
di stricts located in the northeast and northcentral regions and hi gh in those districts located in the South and West. This pattern also
prevailed in the Boston and New York Districts
for other production expense loans where a
much larger s~rn1ple of loan s was avai lable .
Chmt I indi ca tes that lives tock feeders located in the Dalb ~ Fedcr,1I Reserve Di. trict,
on an ,1vcrnge, p.1id a full 1.44 percentage
points, or 24 per cen t, more th an livestock
feeders in the Cleveland , Philadelphia , and
Richmond Districts. The Chicago ,111d St. Louis
Districts al so had relatively low rates. Rates in
the San Francisco District, along with th e Dal Federal Reserve
Districts

6

Chart 1

INTEREST RATES CHARGED BY COMMERCIAL
BANKS BY FEDERAL RESERVE DISTRICT
June 30, 1966*

Differences from U.S.
Averooe Interest Rote (in tenths)
+1 .0

--

7 .41

FEEDER LIVESTOCK
LOANS

+ .8
+.6
+ . 4-

+ .2

l

6.57 -

-.2

-. 4
- .6

L

5.98 5.975

L

__L

5.99
__L

l

_L__j__J___L__l_j_

ti .0

+ .8
+.6

t

7.74

OTHER OPERATING
EXPENSE LOANS

+ .4

6 .88 -. 2
-. 4-

-.6
-.8
6 .04
-1.0
C:

0

Federal
Reserve
Districts

t;
0
CD

-""
0

>-

t
z

C
..c;
0..
Q)

-c
C
..c;

0...

-c

-c

C:
C

0

Q)

E

>

Q)

u

C:

..c;

u

a::

C

0

C

u

t

+-

<t

0,

C

..c;

u

,n

,n

::,
0
...J

0

+=

(/)

0..
C
Q)

C:
C:

:::E

>,

+-

u
,n

,n
C
C

0

C

"'

C:
C

::,,:

• Adju sted for factors in dicoted in introduction to article .
1Comparability questionable because of factors discussed
article .

-~
V
C

C

~
C:
C
(fl

in

las District, were substantially higher than for
the Nation. In th Atl anta, Kan as City, and
Minneapolis Di stricts, th ey were moderatel y
higher than for the Nation.
Federal Reserve Bank of Kansas City

Bank Credit Flows
Chart 2

INTEREST RATES CHARGED BY COMMERCIAL BANKS
ON OTHER OPERATING EXPENSE LOANS, BY STATES
June 30, 1966

$-Statewide branch banking .
L-Limited branch banking.
*Resu lts need to be interpreted with core because of paucity of form loons.

Regional variability on operating expense
loans followed the same genera l pattern as for
feeder livestock loans. Geographic region, as
measured by Federal Reserve district, accounted for 14 per cent of total variability in
interest rates charged on other operating expense loans. Rates charged varied from a high
of 7. 7 per cent in the Dallas District to a low
of 6 per cent in the Richmond District. Thus,
farmers in the Dallas District paid a full 1.7
percentage points, or 28 per cent, more for
other operati ng credit than farmers in the
Richmond District. Rate s in the Boston and
New York Districts were below the national
average, as they were for all other Federal Reserve districts located in the northeast part of
the Nation.
Chart I reveals a high degree of comparability in the direction and magnitude of variabil ity
Monthly Review • October 1968

in rates charged for fceder livestock and operating expense loans among the Federal Reserve
districts. When one considers that the rates
being compared have been adjusted for variability in such factors as net worth of borrower, gross dollar vaJue of sales, size of note,
type of farming, security, size of bank, and
loan-deposit ratio of bank, it is obvious that
wide regional variability prevails m rates
charged on quite similar loans.
Average rates charged farmers
By States
for operating expense loans
( other than for purchase of feeder lives tock), adju ·ted for variability in net
worth of borrower, arc shown by states in
Chart 2. For the reasons mentioned previously,
variability in rates was greater among states
than among Federal Reserve di tricts. Region,
as measured by states, accounted for 23.8 per
7

Bank Credit Flows

cent of total variability in interest rates charged
on operating expense loans in the Nation.
Farmers with the same net worth in Louisiana,
a high-rate state, paid a full 2.25 percentage
points, or a 38 per cent higher rate, than
farmers in North Carolina, a low-rate state.
Although there is substantial variability in
rates charged in adjoining states in a few instances, generally rates by states again tend to
be low in the northeast and northcentral regions
and high in the Western and Southern States.
It is difficult to find either statistical data or
empirical evidence of any kind that suggest that
;1griculture becomes mor risky or that farm
loans arc more costly to make as one moves
from the northeast and northccntral regions
into the Southern, Rocky Mountain, or Pacific
States. In fact, the evidence, as measured by
income per farm, would tend to suggest the reverse. Arizona, California, and Florida-the
three highest ranking states in income per farm
in 1966 and most other recent years-are all
high-interest rate states. North Carolina-the
state with the lowest interest rates-is substantially below the national average in income per
farm. Furthermore, year-to-year variability
in farm income docs not appear to be the explanation for rate variability from state to state.
REGIONAL VARIABILITY

The general pattern of rates on comparable
loans suggests considerable immobility in the
flow of bank credit. It is difficult to explain
why a farmer with about the same dollar volume of business, net worth, kind of farming
operation, and security, pays a substantially
higher interest rate for financing a loan for the
same purpose if he lives in the western or
southern parts of the United States than if he
lives in the northeast or northccntral regions.
Banking structure obviously is not the explanation, since branch banking prevails in both
high- and low-rate areas. Furthermore, there
are both high- and low-rate areas in unit banking regions. Usury laws appear to have a sub8

stantial influence in some states; however, to
the extent they are effective in holding .rates
below average, it may be that low rates are
achieved at the expense of inability to obtain
adequate credit. The indications of lack of
mobility suggest that a relatively large proportion of funds remains in states with low usury
rates, despite the fact that higher rates could
be attained outside the state.
It has been contended that rates are high
in the South and West because of rapid growth
and strong demand for credit. Even if this were
the case, in a highly competitive economy funds
would flow freely enough between two states
to prevent a 38 per cent difference in the price
of money for highly comparable loans. Furthermore, when con idcring the extreme low- and
high-rate states- North Carolina and Louisiana
- it is doubtful that much difference in growth
rates prevails between these states. High-rate
states frequently are not the rapidly growing
states, and low-rate states frequently are not
those with stagnant economies. It also should
be pointed out that regions with stagnant economies usually are higher risk areas and, therefore, would be inclined to have higher interest
rates.
Several potential explanations arc available
for the immobility that apparently prevails in
the flow of funds. Rural banks in the South
and West arc more likely to be isolated from
money centers than those in the northeast and
northcentral regions. Frequently, there are
fewer competing financial institutions and they
tend to have less easy access to market information and funds from financial centers. Many
of the mechanisms currently being used by
money center banks for increasing the mobility
in the flow of funds arc not available on a
practical basis to such rural banks. Furthermore, small rural banks are not large enough
to compete for, and retain, the best management and cannot have specialists for the numerous diversified services that banks are expected to perform. Consequently, managerial
Federal Reserve Bank of Kansas City

Bank Cred it Flows

inertia is more likely to prevail in small rural
banks than in large banks in financial centers.
Also, legal limitations such as loan limits arc
likely to force many large customers to larger
banks. The farther the customer is removed
from his bank, the less well known he is and
the more difficult it is to properly serve his
needs. Thus, in areas such as the South and
West, where customers arc farther removed
from larger banks, they may pay higher rates
for the same crvice.
FinaJly, the fact that a large proportion of
bank reserves is made available through open
m:1rket operations, which arc dependent on the
functioning of .i highly developed system of
financial markets, may have an impact on
regional variability . All open market operations
t1rc conducted in New York Ci ty with dealers
who have nationwide contacts. This method
probably works satisfactorily for money center
banks and for large national firms who can
shop around for funds. The previous analysis
raises doubts as to whether the system works
perfectly for rural areas.

If impersonal market forces allocated funds
optimally in the current economic env ironment,
interest rates should not vary by as much as 28
per cent between Fed ral Reserve districts, and
38 per cent betwe n states on similar kinds of
farm loans. Individuals and firms that use
smaller amounts of capital cannot be as sophisticated in either investing or shopping for
funds as those who deal in large quantities.
They cannot afford to invest the necessary resources to keep as well informed on financial
markets, nor spend the necessary money to
shop in all the Nation's financial markets in
order to get the best price . Even if they did
such shopping, they likely would not receive as
attractive rate offerli from distant financial
markets because of geography and the fact that
they would not be well known in such markets.
Thus , consideration might be given to implementing devices which would improve regional
distribution of bank reserves.
Monthly Review • October l 968

SUMMARY AND CONCLUSIONS

A careful evaJuation of interest rates charged
farmers by commercial banks indicates substantial regional variability in the flow of bank
credit to rural areas in the United States.
Rates on imilar agricultural loans vary by as
much as 28 per cent among Federal Reserve
districts, with a general pattern of being relatively low in the northeast and northcentral
parts of the Nation and relatively high in the
southern and western parts of the Nation.
Studies made on interest rate on housing mortgages in different metropolitan areas suggest
co111p:1rable, hut less wide, variability prevails
on such notes . Rates on prime business loans
show less variability .
Although there arc several explanations for
regional variability, the fact remains that bank
credit apparently is less available to many borrowers in certain sectors of the economy in
some regions than for comparable borrowers
in other regions. To the extent that such variability prevails, bank credit is not distributed
optimally. Thus, monetary policy authorities
need to be concerned with methods for identifying and minimizing such variability. The preceding research identifies regional variability
insofar as farm credit is concerned, and suggests that mechanisms need to be developed
for improving financial markets as they are
applicable to rural communities. Improved financial markets will enable impersonal marketing mechanisms to more nearly distribute
bank credit optimally in such communities.
It appears that branch banking has not provided a satisfactory solution as many contend,
since wider vari ability prevails among states
with branch banking than among unit banking
states. A satisfactory solution will require managerial personnel that arc fami liar with rural
economies and agricultural finance, regardless
of bank tructurc. It also i likely to become
increa ingly necessary for banks to make other
provisions for the credit needs of rural cus9

Bank Credit Flows

tomers if they are unable to finance such
customers completely because of loan limits .
APPENDIX

Multiple linear regression with dummy (zeroone) variables was used to analyze borrower,
lender, loan, and market characteristic . Average effective intere t rate-the dependent variable-was regressed on alternative independent
explanatory factors in order to explain variations in interest rates for agricultural loans. The
use of micro-economic cross-sectional data
from the June 30, 1966, Agricultural Loan
Survey permitted an inten, ive examination of
those factors believed to most influence interest rates. The use of dummy variables to represent subclassifications of explanatory factors,
such as for ach net worth grouping, Federal
Reserve district, etc., permitted the inclusion
of qualitative attributes, implified multivariate analysis, and provided for alternat ive functional forms. Several models of the fom1

Y

= a+

bl

X l + b2 x2 + ... + bn X n + e

were estimated for different loan types and (n)
factor-variable combinations.
The technical procedure for this study is
documented in an article on "Least- qwues
Analysis," by Emanuel 0. Melichar.' Each response in the survey was coded as a I in the
class of its membership, all other subclasses for
the same factor were given a value of O; thus,
the derivation of the term "dummy variable."
Since, under this approach, there are more coefficients than there are independent normal
equations based on the least-squares methodology, each multiple regression model was constrained by setting one coefficent in each Fae-tor-variable group at zero . The computed regression coefficients were then adju ted o that
each could be interpreted as the net difference
1
For an excellent detailed disc ussion of the methodology
used ee Emanuel 0 . Melichar, "Least-Squares Analy 1s
of E~onomic Survey Data," 1965 Proceedin~s of the _B~1siness and Economic Statistics Sec tion , American Stat1st1cal
Assoc iation.

10

from the national average loan rate associated
with loan membership in any given variable
c1assification. Thus, a coefficient for the Tenth
Federal Reserve District indicates the amount
loans in the District differ from the national
average rate.
The terms "gro s" and " net" used in Appendix Tables I, 2, and 3, relate to the particular regression models being tested. Gross
coefficients are obtained for the classes of a
factor when only the variables representing that
factor were used in the regression equation. In
these models, the influence of all other factors
may interact with the factor under investigation.
Net coefficients arc from equations of several
factors where the influence of each oth r factor
is held con tant whit d tcrmining the r gression solution. These coefficient then have been
adjusted for the influence of the other explanatory factors included in the model.
Extensive preliminary tests of the methodology and other explanatory factors were made
using Tenth District survey data.~ Numerous
data cross-c1assifications were examined for
evidence of interaction. Although some interaction wa identifiable, it was not deemed serious enough to warrant the addition of interaction terms. Likewise, the omission of notes
with blank observation wa not consid red
troublesome, since, with few exceptions, a high
proportion of the sample was usable and the
blank responses seemed random. Because of
the large sample size and the numbers of variables used, statistical significance of correlation coefficients using the standard F-ratio was
virtually assured.
The analysis of factors used in computing
intere t rates on feeder livestock loans by Federal Reserve districts (Table I) and other operating expense loans by both Federal Reserve
district (Table 2) and tates (Table 3) conclude the appendix.
"G . L. Swackhamer and R. J . Doll, "Interest Rate Variability- Feeder Livestock Loans," Monthly Re1•iew, Federal Reserve Bank of Kansas City, March 1968.

Federal Reserve Bank of Kansas City

Bank Credit Flows

Table 1
ANALYSIS OF FACTORS INFLUENCING INTEREST RATES
ON FEEDER LIVESTOCK LOANS IN THE NATION

Explanatory Factors
and Subclassifications
(In dependent variables)
Totals and Averages

Gross
Variation
in Rates
Explained
by Each
Factor
(In per cent)

Net Explanatory
Contribution of Factor

Gross
Differences
from National
Average Rate
Associated
with
Membership
in Subclass

When Combined with
All Other
Factors
(In per cent)

Differences
from National
Average Rate
Associated with
Membership
in Subclass

26.91

6.571

1.97

.401
.115
- .049
-. 108
- .186

3.09

.578
.405
.126
- .079
- .254

No . of
Sample
Loans

Total No .
of Loans
Expand d
from
Sample

7,405

221,678

6.571

.805
.283
-.065
- .281
- .397

Gross Dollar Sales
Less than $5,000
$ 5,000 to 9,999
$10,000 to 19,999
$20,000 to 39,999
$40,000 and over
Net Worth
L ss than $5,000
$ 5,000 to 9,999
$ 10,000 to 24,999
$ 25,000 to 99,999
$100,000 and over

497
637
1,209
1,033
4,029

29,985
33,943
69,190
50,508
38,053

212
256
872
2,202
3,863

10,987
16,633
50,106
97,935
46,019

Bank Size by Deposits
Less than $3 M
$ 3M to 4.9 M
$5Mto14.9M
$15 M to 24.9 M
$25 M to 49.9 M
$50 M and up

542
704
1,832
645
672
3,010

48,067
59,142
74,549
13,708
6,325
19,887

69
41
132
224
182
234
1,233
470
499
2,394
713
1,214

964*
680*
2,621
7,967
5,168
7,503
68,076
18,558
28,081
56,903
14,963
10,193

215
589
1,952
3,301
1,348

18,410
38,676
63,275
67,043
34,274

2,600
1,132
1,493
740
490
950

139,111
42 ,019
28,821
7,360
2,920
1,447

12.24

1.062
.655

12.14

1.26

.227
- .154
-.409
.228
-.046
-.065
- .123
- .155
-.038

0.80

.159
-.057
- .027
- .015
.113
.140

Federal Reserve District

Boston *
N w York*
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kan\as City
Dallas
San Francisco

12.65

.221 *
.785*
-.516
- .427
-.382
.236
- .405
- .033
.136
.157
.967
.508

11.70

.109*
.695*
-.587
- .595
- .581
.147
- .298
- .103
.178
.1 02
.835
.632

Loan/ Deposit Ratio

0 -3 9%
40- 49
50 - 59
60 - 69
70% and up
Loan Size (Fl & RE)
Less than $5,000
$ 5,000 to 9,999
$ 10,000 o 24,999
$ 25,000 to 49,999
$ 50,000 to 99,999
$100,000 and up

1.02

4 .24

-.119
-.087
- .067
.029
.229
.173
- .283
-.313
-. 218
-.368
- .303

1.18

0.46

-.268
-.121
.022
.065
.115
.055
- .093
-.080
-.049
-. 225
-.258

*If information on any variable was omitted, such notes were dropped from the analysis. In these districts, the sample was small
for feeder livestock loons , and a large proportion of the notes was dropped because of fa ilure to report information on one or
more of the variables. Careful perusal of all data indicate the results may not be typical.

Monthly Review • October 1968

11

Table 2
ANALYSIS OF FACTORS INFLUENCING INTEREST RATES
ON OTHER OPERATING EXPENSE LOANS IN THE NATION
Gross
Variation
in Rates
Explained
by Each
Factor
(In per cent)

Net Explanatory
Contribution of Factor

Gross
Differences
from National
Average Rate
Associated
with
Membership
in Subclass

When Combined with
All Other
Factors
(In per cent)
23.00

Explanatory Factors
and Subclassifications
(Independent variables)

No. of
Sample
Loans

Total No.
of loans
Expanded
from
Sample

Totals and Averages

28,634

1,109,604

6 .885

3,518
5,470
6,964
4,749
7,933

179,323
287,676
346,479
187,561
108,565

2.47

.307
.097
-.072
- .115
- .336

1,816
2,179
5,738
10,266
8,635

79,384
108,108
285,602
470,653
165,857

3.26

.319
.312
.129
- .077
-.361

2,791
3,325
9,592
2,767
1,583
8,576

200,915
227,420
433,642
87,098
25,790
134,740

481
833
393
855
2,957
2,318
2,622
1,983
2,426
3,705
4,156
5,905

4,421
14,987
7,916
36,052
87,083
92,264
233,112
115,698
148,106
166,045
122,383
81,583

5,508
3,912
7,653
365
2,458
8,738

189,029
206, 192
200,634
10,867
83,400
419,482

12,471
12,871
3,292

587,975
399,580
122 ,048

1,306
3,072
6,969
11,515
5,772

93,359
179,282
335,923
331,341
169,999

9,783
7,453
3,576
2,794
5,028

512,489
331,938
129,772
75,531
59,874

Differences
from National
Average Rate
Associated with
Membership
in Subclass

6.885

Gross Dollar Sales

Less than $5,000
$ 5,000 to 9,999
$10,000 to 19,999
$20,000 to 39,9 99
$40,000 and over

.247

.o,u
0.89

-.069
- .056
-. 209

Net Worth

Less than
$ 5,000
$ 10,000
$ 25,000
$1 00,000

$5,000
to 9,999
to 24 ,999
to 99,999
and ov er

0.93

.169
.169
.082
- .017
- .283

Bank Size by Deposits

Less than $3 M
$ 3M to 4.9M
$5Mto14.9M
$15M to 24.9M
$25 M to 49.9 M
$50 M and up

0.90

.204
-.048
- .010
.005
- .209
-. 153

0 .61

.154
-.024
-.009
.007
.090
-.182

Federal Reserve District

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

14.44

-.022
-.333
-.696
-. 571
- .704
.275
- .343
-.201
.083
.146
.906
.284

14.24

-.240
-.423
- .748
-.686
-.841
.138
- .237
- .232
.058
.130
.856
.559

Farm Type

Meat Animal
Cash Grain
Specialty Crop
Poultry
Dairy
General

0.60

.006
-. 160
.028
-.002
.193
.024

0.86

.010
-. 104
.020
.184
.309
-.029

Security

Unsecured
Collateral Mortgag e
Other Securities

4.96

- .191
.341
- .196

0.74

-.307
.043
- .014
.032
.088

1.16

.126
-.066
- .135
-. 154
-.227

0.78

- .071
.133
- .094

1.10

- .311
- .056
- .016
.067
.132

0.46

.077
- .025
- .078
- .111
-. 216

Loan/ Deposit Ratio

0 - 39%
40 - 49
50 - 59
60 - 69
70% and up
Loan Size

Less than $1,000
$ 1,000 to 2,499
$ 2,500 to 4 ,999
$ 5,000 to 9,999
$10,000 and up

Table 3
ANALYSIS OF FACTORS INFLUENCING INTEREST RATES
ON OTHER OPERATING EXPENSE LOANS IN THE NATION

Total No .
of Loans
Expanded
from
Sample

Gross
Variation
in Rates
Explained
by Each
factor
(In per cent)

Net Explanatory
Contribution of Factor

Gross
Differences
from National
Average Rate
Associated
with
Membership
in Subclass

When Combined with
All Other
Factors
(In per cent)

Differences
from National
Average Rate
Associated with
Membership
in Subclass

26.38

6.885

6.44

.459
.344
.161
- .072
-.516

23.82

- .120
.302
.533
.335
-. 161
-.069*
-.735*
.324
.633
.775
-.650
-.571
-. 154
.008
-.976
1.254
.028
-.606
.426*
.009
.074
.206
.092
.360
.181
.349
- .285*
-.558*
.761
-.311
-.992
.121
- .413
.708
.118
- .743
-.728*
-.327
-.012
-.893
.939
1.003
-.203
-.826
.428
- .714
.1 01
.438
.167

Explanatory factors
and Subclassifications
(Independent variables)

No . of
Sample
Loans

Totals and Averages

28,634

1,109,604

6.885

1,816
2,179
5,738
10,266
8,635

79,384
108,108
285,602
470,653
165,857

.319
.312
.129
-.077
-.361

Net Worth

Less than
$ 5,000
$ 10,000
$ 25,000
$100,000

$5,000
to 9,999
to 24,999
to 99,999
and over

3.26

State

Alabama
Arkansas
Ar izo na
California
Colorado
Connecticut *
Delaware*
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Moine
Maryland
Mo ssachusetts *
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire *
New Jersey *
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island *
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Other

652
375
481
2,684
471
22

27,463
1,439
19,0 1 l
25,162
16,953
170*

59

744*

345

7,941
27,045
21,364
73,992
42,894
96,153
54,439
30,554
6,821
952
2,977
789*
28,068
73,488
17,745
48,559
12,090
56,994

615
1,115
814
474

1,088
840

524
170
157
92
71
444

902
411
836
377
1,565
154
62
66

470
794

1,651
398

554
252
437
335
l

351
663
536
3,649
136
168
769
655
94

227
235
393

.049

.068
.491
.049

- .275
-. 108 *
- .727 *
.375
.695

21 .31

549

562 *
1,435*
6,530
14,212
47,381
29,927
19,103
22,397
10,332
8,456
43 *
12,146
28,606
25,382
111,719
3,455
1,905
21,852
16,514
2,727
22,196
5,585
2,786

*Result s need to be interpreted with core because of paucity of form loo ns .

.719
-.693
-.604
- .185
-.021
-.81 5
1.384
.044
-.616
.5 18*
.039
.083
.251
.107
.160
.185
.053
- .238*
-.831*
.627
- .306
-.809
.082
- .419
.760
-. 176
- .659
- 1.245*
-. 207
-.003
- .746
.927
.871
-. 179
-.765
.283
-.696
.106
.330
.257

Farm Participation Loans in the
Tenth Federal Reserve District
fJy fJ/ai11e W. Bicket
"1 Al'ITAI. AND credit rcquircnH.: nts of agri .--" cultun: have increased rapidly in recent
years both in the aggregate and on a per farm
basis, and pre ·ent trend indicate that credit
needs will accelerate in the future. Y ct, even
now farmers are seeking lines of credit which
exceed their banks' legal lending limits. This is
especially true in the Tenth Federal Reserve
District' due to the disparity between bank size
and farm size and the predominant banking
system.
Tenth Di strict banking is predominantly
unit banking, with New Mexi co the only Di strict state with provision s for limited branch
banking. Many District banks in rural communities arc relatively mall ; their capitalization and deposit growth rates have not kept
pace with the dynamic credit requirements
of agriculture. Total deposits at commercial
banks in the District increased 67 per cent
between 1956 and I 966. [n contrast, the total
out tanding doll ar a mount of agricultural loa ns
increased 176 per cent during the sa me period.
Di stric t state s have more larger-than-average
farms, a nd investm ent in production assets
per farm is quite hi gh. An indication of the
increase in investment and the subsequent increase in credit needs is reflected by figure s
(

1

Co lorado, Kansas,
ebraska , W yo ming, and parts of
1issouri , New Mexi co, :ind Oklahoma .

14

from the Federal Reserve System's agricultural
loan surveys. During the I 0-year period ended
June 30, 1966, the number of borrowers increased 13 per cent, while the number of outstanding loans increased 23 per cent, and the
number of loans in excess of $25,000 increased
287 per cent. These increases appear even
larger considering the fact that the number
of farms decreased by 20 per cent during that
period.
Many banks, however, cannot legally make
a loan of $25,000. The National Banking Act
limits the size of loan a national bank can
make to IO per cent of the bank's net unim paired capital and surplus, unle s the loan is
sec ured by livestock ; in which case the limit
is 25 per cent. Therefore, a $25 ,000 loan requires that the lending bank have $ I 00,000
or $250,000 in capital and surplus, depending
on the purpose of the loan . At the time of the
survey, one out of every nine banks in the
Di strict had less than $ I 00,000 and one third
had less than $200,000 in capital and surplus.
Most stale s also set limits on the size of loan
a sta le hank can make . These limits vary from
state to state.
Customer requ es ts for credit which exceed
th e lega l le nding limit of the bank arc commonl y referred to as overline requests. In the
1966 survey, District banks reported being
Federal Reserve Bank of Kansas City

Fa rm Part icipation Loans in the Tenth Federal Reserve Distri ct

unable to g rant 3,204 otherwise acceptable
farm loan s from th ei r own resources during
the previous year becau se requests exceeded
legal limits. These requ ests amounted to more
than $ 13 I million , or an average of $4 1,000
per loan.
When a bank receives an overline request,
there arc alternat ive solutions such as suggesting ,1 sma ll er loan, ref rrin g the cu tamer to
a larger bank or to so me other financial institution, or a rrang in g a participation loan
with a seco nd bank. The latter procedure is
frequently preferred by th e banker, s ince th e
alternatives may mea n complete loss of the
account.

Chart 1
DISTRIBUTION OF OUTSTANDING DOLLAR
AMOUNT OF FA RM PARTICIPATION LOANS
BY FEDERAL RESERVE DISTRICT
June 30, 1966

Boston
New York
Philadelphia
Cleveland

*

Richmond

1.7

Atlanta
Chicago

SIGNIFICANCE OF PARTICIPATION LOANS

Sev ml omparisons c,in be mad e to illu -;trate the relative importance of farm partici pation loan . In relation to all agricultural loan s
in the Tenth District, participation loan s accounted for 12 .6 per cent of the total dollar
amount outstanding (Table I) , while th e average ratio of participation loans to total loan s
in the United States was less than 5 per cent.
The $1.9 billion of al l farm loa ns outstanding
in the Tenth Di strict represe nted only 16 per
cent of total a!.!,ricultural loan vo lum e in th e
United States; but, when p,1rticipation lm1 ns
were iso lnt ' U, the Di strict had 45 per cent of
the o ut standing amount of th e c loans. Chart
Table 1
OUTSTANDING AGRICULTURAL LOANS
June 30, 1966
Tenth
District

United
States

All Loans

$1,913,076
Total Outstanding Amount
(thousands )
Average Outstanding Amount $
3,985

$ 11 ,711,129
$

3,355

$ 241,731

$

543,471

80,678

$

69,090

Participation Loans

Total Outstanding Amount
(thousand s)
Average Outstanding Amount

$

NOTE : Partici p a tion loans re fe rs only to th o se loans orig inated by banks reporting on the June 30, 1966 , survey .
Amount outstanding represents the amount held by the re porting bank plus the correspondent ' s share .

Monthly Review • October 1968

St. LOUIS
M1nneopol1s
Kansas City
Do I las
San Francisco
0

5

10

Per Cent oi Total

15

20

I shows how the $543 million in outstanding
p~1rticipation loans was di stributed among th e
12 I ·cclern l R ese rve districts.
To provide a better understa ndin g of the
role of participation loa ns in agricultural fin ance in the Tenth District, this article will
describe th e characteristics of those banks
wh ich originated participa tion loans, the characteristics of farmers to whom these loans
were made, and th e characteristics of the loans.
The rel a tion hips and trends presented hereinafter, while concentrating on the Tenth Di strict, arc representative of participation lending throughout the United States unl es otherwise stated.
BANK CHARACTERISTICS

The 1966 survey showed that more th an
half of the Di strict's banks reported working
15

Farm Participation Loans in the

with outside financing sources to obtain additional fin a ncing for their farm customers during
the year preceding th e survey , compared with
one third of all bank s nationally . A small percentage of the se banks obtained funds from insurance companies or agricultural credit corporation s, but the majority worked with co rrespondent banks . Nationally , it is estimated that
the numbe r of bank s originating partic ipa ti o n
loans increased 2 13 per ce nt between 1956 and
1966, while the number of banks participating
in loans or igin ated by ot hers increased 180
per cent.
Capital and Surplus

Bank s with capital and surplus under $200 ,000 originated 4 7 per ce nt of the number of
out ·tanding participa tion loans in the Tenth
Di strict, while banks with capital and surplus
grea ter than $ I million originated only 6 per
cent. Conversely, and somewhat contrary to
the general concept of participation lending,
25 per cent of the outstanding doll ar volume
of participation loans originated from banks
with capital and surplu s of $ I million or more;
whe rea s, 21 per cent was originated by banks
with capital and surplu s under $200,000
(Table 2). Thi s was a result of the extre me
variation in average loan size betwee n those
two capital and ·urplu s categories.
The number of overline requests wa s closely
associated with bank size. The distribution of
t~e number of overline requests by size of
capital and surplus was as follows: Less than
$100,000, 9 per cent ; $100-$199,000, 26 per
cent; $200-$299,000, 34 per cent ; $300$499,000, 27 per cent; $500-$999,000, 3 per
cent; and over $ I million , I per cent.
B ank s reporting overJinc requests originated
38 per cent of the outstanding participation
loan volume and only 30 per cent of total
agricultural loan volume, which indicates that
an appreciable number of financing difficulti es
were resolved through participation lending.
16

Table 2

FARM PARTICIPATION LOANS
BY BANK CHARACTERISTICS
TENTH FEDERAL RESERVE DISTRICT
June 30, 1966
Amount Outstanding
Average
Per Loan

Total
(In thousands
of dollars)
Capital and Surplus (In
thousands of dolla rs)

7,273
43,948
55,813
49,935
23,312
34,871
26,577

$ 20,478

$ - 33,554
31,198
76,041
100,940

$ - 70,431
63,973
108,371
75,865

$ - 24,421
43 ,02 6
174,285
$241,731

$ -

$

Less than $100
$100-$199
$200-$299
$300-$499
$500-$999
$1,000 -$1,999
$2,000 and ov r

-42,177
96,624
86,158
89,194
267,745
528,573

Loan -Deposit Ratio (P r cent)
Less 1han
40-49

40

50-59
60-69
70 and over
Difficulty in Financing Farm
Customers, Compared with
Other Years
Smaller
Same
Greater
No difficulty
Total
NOTE : Detail s
rounding .

may

not

add

to

totals

due

to

-

82,424
50,149
94,616
$ 80,678
independent

Ove rlines, however, were not the sole rea. n
for originating participation loan .
Loan-Deposit Ratio

Since larger banks are usually located in
money centers, they generally have higher loandeposit ratios than smaller banks. A cross
cla sification of capital and surplus with loandeposit ratio showed that banks with over
$500,000 capital and surplu had loan-depo it
rati os of at least 50 per cent, while a loande posit ratio of at least 60 per cent was observed at all banks with capital and surplus
of more than $2 million. No sa mple banks
with loan-deposit ratios below 40 per cent
originated participation loans, but almost three
Federal Reserve Bank of Kansas City

Tenth Federal Reserve District

fourths of the dollar volume was originated at
banks with loan-deposit ratios of at least 60
per cent.
The urvey revealed that the frequency of
overline requests also was related to the loan deposit ratio. Tn the Tenth Di strict, 516 banks
with loan-deposit ratios less than 50 per cent
received 355 overline requests from farm customers; whereas, 378 banks with loan-deposit
ratios of 70 per cent and over received 940
such requests during the year prior to the survey.
Difficulty in Financing Farm Customers
Compared with Other Years

Lich h.tnk was asked to indicate th e de g ree or difficulty , if c1ny, encountered in meet ing its financial reque sts, as compared with
past years. The fact that none of the sa mpled
bank originating participation loans reported
less difficulty was of special interest. If any
difficulty was present, it was at least the same
as, or greater than , in past years.
Seventy-two per cent of the participation
loan volume in the Tenth District originated
from banks which reported no difficulty. However, the survey showed that some banks with
overline requests did not report farm financing diffi ulties, which points out the difference
of opinion among banks as to what constitutes
difficulty in financing . For some banks, any
loan request exceeding the bank's legal loan
limit or resource capability represented financing difficulty, while other banks considered
a similar situation normal business.
BORROWER CHARACTERISTICS

As of June 30, I 966, 2,755 farmers, or
I. I per cent of all farm borrowers in the Tenth
District, had 2,996 outstanding participation
Joans. The characteristics of these borrowers
v"ried substantially, but examination of several measurable traits identifies those farmers
mo t likely to have participation loans .
Monthly Review • October 1968

Net Worth of Borrower

In 1956, only 4 per cent of all fann borrowers in the Tenth District had net worth
in excess of $ l 00,000, but data from this
period do not indicate how many of these
borrowers had participation loans. By 1966,
I I per cent of all borrowers attained this net
worth level, with 1,569 having participation
loans. This represents 57 per cent of all participation borrowers, who, in turn, accounted
for 76 per cent of the outstanding dollar volume of participation loans.
With th e exceptio n of the lowest net worth
category, average loan size increased as net
worth increased (Table 3). The one exception
can be explained by the fact that a few large
borrowers had low or nega tive net worth;
hence , a di storted relationship appears in thi s
category.
Annual Gross Sales

Average loan size remained fairly constant for the three groups of borrowers having
annual gross sales of less than $40,000although the number of Joans and, consequently, the total amount outstanding, increased as annual gro s sales increased. For
those borrowers with gross . ales reported at
more than $40,000 per year, the average Joan
was $133,359-nearly five times as large as
for the other groups.
Over 54 per cent of the District participation loan users had annual gross sales of at
least $40,000, compared with only 6 per cent
for all farm borrowers. Nationally, half of the
participation borrowers and 5 per cent of all
farm borrower · produced at least $40,000
of farm products each year.
Tenure

The survey revealed that full owners in the
Tenth District held 48 per cent of the number
of participation loans, while part owners held
an additional 34 per cent, tenants 17 per cent,
17

Farm Participation Loans in the

Table 3
FARM PARTICIPATION LOANS
BY BORROWER CHARACTERISTICS
TENTH FEDERAL RESERVE DISTRICT
June 30, 1966
Amount Outstanding
Total
(In thousands
of dollars)
Net Worth of Borrower
Less than $5,000
$5,000-$9, 999
$10,000-$24,999
$25,000-$49,999
$50,000-$99, 999
$100,000-$ 199,999
$200,000 and over
Not reported

Individuals by Age
Groups, Corporations,
and Partnerships
Under 35
35-54
55 and over
Corporations
Partnerships
Not reported

not

5,555
12,386
36,643
52,637
131,103
2,548

17,710
30,135
54,473
63,322
176,232
186,500

250
11,414
29,300
200,768

$ 21,542
27,931
27,369
133,359

$158,972
53,781
27,220
1,759

$1 09,521
53,096
54,329
57,063

$

add

6,588
115,151
42,233
46,116
28,586
3,057

$ 41,373
65,148
80,292
245,915
82,920
272,000

$201,769
37,941
1,632
390
$241,731

$121,501
31,936
12,000
33,583
$ 80,678

to totals

due

to

independent

and landlords I per cent. These figure compare cJosely with the actual di tribution of
farm tenure in the District, a , found in the
1964 Census of Agrirnlture (full owner, 50
per cent; part owner, 31 per cent; tenant, 18
per cent; and landlord, I per cent) . The
$109,52 I outstanding per full owner probably
was abnormal, since full owner farms arc
frequently small and likely to be debt-free.
18

Average size of participation loans increased
as the age of sole proprietors increased. Operators 55 years of age and over held an average
of $80,292 in outstanding participation loans,
which was very close to the overall average
for the District. Individuals held 67 .8 per cent
of the total out tanding volume, with over
70 per cent of that amount held by borrowers
in the 35 to 54 age group.
Corporate farms were responsible for le s
than one fifth of the total outstanding participation volume, but each loan was approxi mately three times as large as the District
average. Participation loans h Id by partnerships were slightly larger than the verall average and represented 12 per cent of the dollar
volume. Corporations and partnerships accounted for a combined total of 10 per cent
of all farm loans in the District.
Type of Fa rm

Type of Farm
Meat-animal
General
Cash-grain
Dairy
Total
may

$ 85,437

$

Tenure
Full-owner
Part-owner
Tenant
Landlord

NOTE: Details
rounding .

860

$

Annual Gross Sales
Less than $10,000
$10,000 -$19,999
$20,000-$39,999
$40,000 and over

Average
Per Loan

Individuals by A ge Groups,
Corporations, a nd
Pa rtnerships

About 60 per cent of the participation borrowers were tho e whose farms were classified
as " meat animal." These borrowers accounted
for 83 per cent of the outstanding dollar volume of participation loans, a nd also held by
far the large t average size of loan. It al o
was observed that a high proportion of operators of meat-animal farms had gross sales
in excess of $40,000 and fell into the over
$100,000 net worth group. Operators of general farms-those farms on which no single
product or group of products amounted to
50 per cent or more of the value of all products sold- were next in total dollar volume,
followed by cash-grain and dairy farm
LOAN CHARACTERISTICS

The most striking characteristic of participation loans wa their size. The total outstanding amount of participations held by borFederal Reserve Bank of Kansas City

Tenth Federal Reserve District

total participations (Table 4). In contrast, less
than half of total farm loan volume was used
to purchase livestock. It should be pointed out
that loans to purchase feeder livestock were
probably near their seasonal low at the time
of year the survey was taken.

Table 4
FARM PAR
ION LOANS
BY LOAN CHARACTERISTICS
TENTH FEDE
R
DISTRICT

June 30, 1966
Amount Outstanding
Total
(In thousands
of dollars)

Average
Per Loan

Purpose of Loan
$114,8:30
89,248
19,571
2,730
2,966
6,644
5,534
208

$112,283
91 ,974
55,902
11,006
15,635
43,333
90,709
207 ,800

3,965
199,023
31,681

$ 76,085
85,688
71,589

120
6,943

120,000
39,015

$ 30,332
195,463
7,882
8,055

$113,355
78,152
50,066
114,757

Method of Repaym ent and Interest Charge
Single -payment
$234,668
Insta lment-outstanding balance
7 ,063
Insta lm e nt-add on
In stalment -discoun t

$ 83,295
39,467

Buy feeder livestock
Buy other livestock
Other current expenses
Equipment
Consolidate or pay debts
Farm real
state
lmprovo land and building s
Oth or

Other current expenses ranked next among
the major purposes in terms of total amo unt
outstanding, but comprised a smaller proportion of participation volume than among all
farm loans. Participation lending appeared to
be highly oriented toward short-term loans
- only 5 per cent of the total was used to
purchase farm real estate and improve land
and buildings.
Maturity

Maturity
Dema nd
6 months or less
7-12 months
1-3 years
4-5 years
O ver 5 yea rs

$

Security
Unsecured
Chattel mortgage
Farm real estate
Other

Total
NOTE : Details
rounding .

may

$241,731
not

add

to

totals

due

to

$ 80,678
independent

rowers in the Tenth District, as shown in
Table 1, was nearly $242 million, and the
average size of these loans was $80 ,678. Participation loans also differed from other farm
loa ns with respect to purpose, maturity, security, and method of repayment and intere t
charge.
Purpose

More than four fifths of the participation
loa n volume was u ed to purchase livestock,
with feeder livestock alone accounting for 48
per cent and other livestock 37 per cent of
Monthly Review • October 1968

As indicated above, parti ipation loans were
predominantly hort-term notes - 84 per cent
having maturity dates of six months or less a nd
an additional 13 per cent maturing within a
year. In comparison, the survey showed that
63 per cent of all farm loans matured in six
months or less and an added 25 per cent matured within a year.
All feeder livestock, other current expenses,
and consolidation of debt participations picked
up in the samp le matured in one year or less
and were ingle-payment notes. It was somewhat surpri sing to find that most farm real
estate loans had maturities of six months or
less, while loans for improving land and
buildings generally fell into the "over 5 years"
group. An explanation may be that banks frequently write a participation loan for the purchase of farm real estate on an interim basis
with the understanding that some other financial
institution will ass ume the loan after a given
period of time.
Overdue participation loans represented 1
per cent of the outstanding volume, while 2
per cent of all farm loans were overdue. The
sample showed that no participation loans in
the Tenth District were more than three
months overdue.
19

Farm Participation Loans in the Tenth Federal Reserve District

Security

No participation loans in the sample were
co-maker or Government-guaranteed participations. Only 3 per cent of all farm loans was
secured by these methods .
More than $109 million of feeder livestock
participations was secured by chattel mortgage,
with the average loan size in this classification
being $1 13 ,352. All ample participation loans
for equipment and consolidation of debts were
backed by chattel mortgage , and a large proportion of other livestock and other current
expense loa ns also was secured in this mann er.
Method of Repayment and Interest Charge

The survey revealed that 97 per cent of all
participations w re single-pay ment loans , and
that all sa mple loans for feeder lives tock, other
current expenses, and debt consolidation fell
into this category. The remaining $7 million
outstanding was repaid in instalments with interest charged on the outstanding balance. No
participation loans and only 2.5 per cent of
all farm loans in the sample were made under
the add-on or discount method of interest computation.

20

The average effective interest rate of all
participation loans in the Tenth District was
6.3 per cent, compared with 6.7 per cent for
all farm loans. These rates were identical to the
national averages. The distribution of participation Joan volume by interest rate in the Tenth
District was as follows : 13.2 per cent at 5.05.9 ; 80.2 per cent at 6.0-6.9; 6.3 per cent at
7.0-7.9 ; and .3 per cent at 8.0 and higher.
CONCLUSION

Highlights of the participation pha e of the
Federal Reserve System's June 30, 1966,
Agricultural Loan Survey hav been presented
to illu strate the magnitude of modern agricul tural capital and credit requirements. The
sevenfold increase in dollar amount of participation loa ns outstanding over the preceding decade can be viewed as an attempt by banks to
adjust to, and keep pace with, the increa ing
financial requirements of agriculture.
The question still remains, however, as to
whether the financial needs of tomorrow's sophisticated agricultural borrowers can be met
adequately without developing other techniques
for solving loan limit problems and for pulling
outside funds into many agricultural areas.

Federal Reserve Bank of Kansas City