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September 1990

Primer on Government-Sponsored Enterprises
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Development in the Delta: What does the Future Hold?
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Who is Holding Agricultural Debt?

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______________________________________________________,_______

THE EIGHTH FEDERAL RESERVE DISTRICT

ILLINOIS

INDIANA

CONTENTS__________________________________________________________________________________________________________

Banking and Finance
Government Sponsored Enterprises: A P ro file ........................................................................................................ 1
Business
Realizing the Delta’s Economic P o ten tial................................................................................................................. 6
Agriculture
Commercial Banks Lead Agricultural L ending.......................................................................................................10
Statistics ...................................................................................................................................................................... 13
Resolving the Thrift Crisis—A FIRREA U p d ate.............................................................................................. 16
Pieces of Eight—An Economic Perspective on the 8th District is a quarterly summary of agricultural, banking and
business conditions in the Eighth Federal Reserve District. Single subscriptions are available free of charge by writing:
Research and Public Information Department, Federal Reserve Bank of St. Louis, Post Office Box 442, St. Louis,
MO 63166. The views expressed are not necessarily official positions of the Federal Reserve System.

vernmentSponsored
Enterprises: A Profile
by Michelle A. Clark

Thomas A. Pollman provided research assistance.

A * J ^ ^ s the United States’ largest source of
credit and underwriter of risk, the federal govern
ment plays a major role in the savings and invest
ment decisions of the private sector. Until the sav
ings and loan (S&L) crisis, however, not much at
tention was being paid to the increasing obligations
the government was incurring through federal in
surance programs, direct loans and loan guarantees.
The rapidly escalating cost of the S&L bailout has
attracted the attention of policymakers and the tax
payers who will pay for most of the cleanup. Is a
similar crisis brewing for other federally assisted
credit and insurance programs?
^ ^ T h e Financial Institutions Reform, Recovery,
^^Bfenforcem ent Act of 1989 (FIRREA) instructs
tne Treasury Department and the Government Ac
counting Office (GAO) to examine the total poten
tial exposure of the federal government and, hence,
taxpayers to federally sponsored institution and
program defaults. At year-end 1989, the value of
federally assisted credit and insurance outstanding
totaled $5.8 trillion, a figure greater than the gross
national product for 1989. The Bush Administra
tion has estimated that 88 percent of all outstanding
housing mortgages at year-end 1989 had explicit or
implicit federal government support, while 73 per
cent of total farm debt and almost all student loans
were federally backed. Loan defaults and write-offs
cost the government $14.4 billion in 1989 while
losses from insurance programs totaled $67.2 billion,
nearly all of which were related to insolvent banks
and S&Ls.1
Although the deposit insurance programs make
up the largest portion of total federal credit, the
fastest growing component during the past 20
years has been credit extended by governmentsponsored enterprises (GSEs). This article, the first
in a two-part series, outlines the structure of
GSEs, their role in providing credit to the private
sector and the reasons policymakers are concerned.

^ Irp o s e h n d Structure
No precise definition of a governmentsponsored enterprise exists. A broad definition

would include the 45 organizations listed in table 1.
These organizations are federally chartered or
owned enterprises designed to channel funds to
sectors of the economy deemed worthy of special
support. Though all are corporate in structure,
GSEs are diverse in nature and are involved in ac
tivities ranging from rail and mail service to pen
sion guarantees. The vast majority of GSE credit,
however, is devoted to housing, agricultural and
education finance.
Though enterprises such as the Government Na
tional Mortgage Association (Ginnie Mae) and the
Federal National Mortgage Association (Fannie
Mae) both provide funds to the housing market,
they are very different organizations. Ginnie Mae
is an agency of the Department of Housing and
Urban Development (HUD), and its debt securities
are backed by the full faith and credit of the U.S.
government. Fannie Mae, on the other hand, is a
privately owned corporation, and its debt securities
are not guaranteed by the federal government. A
narrower definition of GSEs encompasses only
those privately owned enterprises like Fannie Mae
whose debt securities have an implicit rather than
explicit government guarantee. Because most of
the concern about possible losses centers on these
more narrowly defined GSEs, this article will
focus on them.

GSE Operations
Most GSEs do not extend credit directly to the
public; rather, they provide funds that other finan
cial intermediaries make available to individuals
and businesses. These funds are channeled to private
lending institutions either through loan agreements
or by buying the assets of private lenders, thus
providing lenders with funds to make new loans.
Most GSEs obtain their funds by selling securities
or debt in the money and capital markets.
The close ties these enterprises have with the
federal government accord them certain privileges
and advantages not enjoyed by other private finan
cial intermediaries, some of which are outlined in
table 2. Most of these GSEs have a line of credit
with the Treasury, allowing them to exchange debt
for funds up to some specified limit. Some GSEs
are not required to pay federal income tax, and
most are exempt from state and local income taxes
as well. Because these GSEs are privately owned,
however, they are also free from many of the con
straints under which government-owned agencies
operate. GSEs are not subject to the appropriations
process of the federal budget nor is their rate of
growth and financing activity controlled by Con
gress. In addition, these agencies can borrow
directly from the Treasury or from financial mar-

Table 1
U.S. Government-Sponsored Enterprises

•Amtrak
•College Construction Loan Insurance Association
(Connie Lee)
•Commodity Credit Corporation (CCC)
•Communications Satellite Corporation
•Corporation for Public Broadcasting
•Department of Housing and Urban Development
(HUD):
—Federal Housing Administration (FHA)
—Government National Mortgage Association
(Ginnie Mae)
• Department of Veterans Affairs:
—VA Mortgage Insurance
•Export-Import Bank of the United States
(Exim Bank)
•Farm Credit System Financial Assistance Corpor
ation (FAC)
• Farmers Home Administration (FmHA)
•Federal Agricultural Mortgage Corporation
(Farmer Mac)
•Federal Crop Insurance Corporation
• Federal Deposit Insurance Corporation (FDIC)
•Federal Financing Bank
• Federal Home Loan Banks (FHLBanks)
•Federal Home Loan Mortgage Corporation
(Freddie Mac)
•Federal Maritime Administration (MarAd)
—Title XI Ship Financing
•Federal National Mortgage Association
(Fannie Mae)

•Federal Prison Industries, Incorporated
•Federal Farm Credit System:
—Banks for Cooperatives
—Farm Credit Banks
•Federal Reserve Banks
•Financing Corporation (FICO)
• FSLIC Resolution Fund
•General Services Administration (GSA)
•National Credit Union Administration Central
Liquidity Facility
• Legal Services Corporation
•National Credit Union Share Insurance Fund
(NCUSIF)
•Overseas Private Investment Corporation (OPIC)
•Pennsylvania Avenue Development Corporation
• Pension Benefit Guaranty Corporation (PBGC)
• Private Export Funding Corporation (PEFCO)
• Rural Telephone Bank
• Resolution Funding Corporation (Refcorp)
•Resolution Trust Corporation (RTC)
•Saint Lawrence Seaway Development Corporation
•Securities Investor Protection Corporation (SIPC)
•Small Business Administration (SBA)
•Student Loan Marketing Association (Sallie Mae)
•Synthetic Fuels Corporation
•Tennessee Valley Authority (TVA)
•United States Postal Service (USPS)
• United States Railway Association
•Washington Metropolitan Area Transit Authority

SOURCE: “ U.S. Government-Sponsored Enterprises (GSEs),” Moody’s Special Comment (February 1990).

kets; other lenders under the direction of the federal
government obtain their funds from the Federal Fi
nancing Bank, which borrows from the Treasury.
As mentioned previously, the largest portion
of GSE credit is devoted to housing, agriculture and
education. The activities of the major GSEs in these
three areas are described below.

Housing—Fannie Mae & Freddie Mac
Although Fannie Mae has been in existence
almost 30 years longer than Freddie Mac, both
enterprises were created to fulfill the same pur
pose: to provide credit to the primary mortgage (or
mortgage origination) market by maintaining a
continuous presence in the secondary mortgage (or
mortgage sales) market, regardless of economic
conditions. Both GSEs satisfy that mandate through
two types of transactions: 1) purchasing mortgages
from loan originators for their own portfolios, thus
providing lenders with funds to originate more
mortgages and 2) issuing mortgage-backed securi
ties (MBSs) in exchange for lenders’ mortgages
(called swaps). Lenders can hold MBSs in their
portfolios or sell them in the money market.

The oldest and most popular MBS issued by
these agencies is the pass-through security (Fannie
Mae) or the participation certificate (Freddie
Mac).2 These pass-through securities have proved
extremely popular because the agencies guarantee
the timely payment to investors of the principal
and interest on loans underlying the securities,
even if the agency has not received payments on
the loans from the mortgage servicer. Fannie Mae
and Freddie Mac receive fees for their guarantee.
The issuance of a pass-though security represents
both a securities sale and a sale of the underlying
pools of mortgages; as a result, mortgages pur
chased and then securitized by Fannie Mae and
Freddie Mac are not assets of the organizations
nor are outstanding agency-issued MBSs liabilities.
Thus, unless retained by the corporation, mortgage
pools and outstanding MBSs do not appear on the
agencies’ balance sheets.
Unlike their sister agency Ginnie Mae, b o tl^ ^
Fannie Mae and Freddie Mac are authorized t( f lH
purchase conventional (non-FHA/VA) m o rtg ag e®
up to specified limits. Fannie Mae and Freddie
Mac are huge players in the residential mortgage
market: in 1989, Fannie Mae’s mortgage portfolio

Table 2
Government-Sponsored Enterprise Links to the Federal Government
Federal
Federal
National
Home Loan
Federal
Mortgage Home Loan
Mortgage
Association Corporation
Banks

Farm
Credit
System

Student
Federal
Loan
Agricultural
Marketing
Mortgage
Corporation Association

Yes (5/15)

Yes (7/21)

$4.OB

No (b)

$1.5B (c)

$1 .OB

Yes

n/a (d)

Yes

Use of Fed as fiscal agent

Yes

Eligible to collateralize public
deposits (all U.S.
government; most state
and local)

Yes

Eligible for unlimited
investment by national
banks and Fed member
state banks

Yes

Eligible for unlimited
investment by thrifts
regulated by FDIC or OTS

Yes

Exemption of corporate
earnings from federal
income tax

Yes

Yes (e)

Exemption of corporate
earnings from state and
local income tax

Yes

Exemption of interest paid
from state income tax

Yes

Subject to GAO audit

Yes (f)

Yes

Federal regulator

HUD

FHFB

FCA (g)

FCA

None

President or presidential
appointees select some
board members

Yes (5/18)

Yes (5/18) Yes (6/14) (a)

Treasury lending authorized

$2,258

$2.25B

Treasury approval of debt
issuance

Yes

Eligible for Fed open market
purchases

n/a = Not applicable
B = Billions
(a)
Each bank
(b)
Treasury is authorized to guarantee up to $4 billion of Financial Assistance Corporation bonds.
(c)
Upon required certification from FAMC, borrowing from Treasury authorized to make payments under guarantee.
(d)
Entity newly created.
(e)
Federal Land Banks, Farm Credit Banks and Financial Assistance Corporation.
(f)
Mortgage transactions may be subject to GAO audit under rules that may be prescribed by the Comptroller General.
(g)
The Farm Credit System Assistance Board also has certain powers with respect to the Financial Assistance
Corporation and the System institutions needing financial assistance.
SOURCE: Statutes and regulations pertaining to the GSEs as summarized in the Report of the Secretary of the Treasury on
Government Sponsored Enterprises (May 1990).

and MBS issues represented 14 percent of all resi
dential mortgages outstanding, while Freddie Mac’s
represented 12 percent. Both GSEs acquire funds
to finance their activities through short- and long
term debt issues. Of the $116.1 billion in Fannie
Mae debt outstanding at year-end 1989, 30 percent
was short-term debt; 64 percent of Freddie Mac’s
$26.1 billion in outstanding debt was short-term at
year-end 1989.
Despite numerous similarities in their structure
and purpose, Fannie Mae and Freddie Mac operate
quite differently from one another. In terms of assets,
Fannie Mae is by far the larger of the two GSEs.
At year-end 1989 Fannie Mae had $124.3 billion
in assets, making it the sixth largest U.S. corpora
tion; the only financial companies with more assets
were Citicorp (number one) and American Express
(number four). Fannie Mae’s assets were 3.5 times
the assets of Freddie Mac at year-end 1989 primari
ly because Fannie Mae keeps much larger portions
of the mortgages it purchases than Freddie Mac.

Agriculture—Farm Credit System & Farmer Mac

ment. Farmer Mac issued $21 million of common
stock in November 1988 and used the proceeds to
purchase investment securities; at mid-1990, how
ever, the GSE had not yet begun secondary market
operations. Once Farmer Mac is up and running,
lenders or originators will be able to sell their
agricultural real estate or rural housing loans to
certified marketing facilities, or poolers, approved
by the agency. The poolers will then issue securi
ties backed by pools of qualified loans. As with
pass-through MBSs, the principal and interest pay
ments on the underlying mortgages will be passed
through to the buyers of the securities. Farmer
Mac provides credit enhancement through its guar
antee of timely payment of principal and interest.
Unlike the housing GSEs, Farmer Mac has a
subordinated participation interest structure. Under
this system, poolers issue securities backed by the
first 90 percent of the pool with the payments
guaranteed by Farmer Mac; securities may be
issued backed by the retained subordinated interest
of the pool, but these securities are not backed by
Farmer Mac.

Education—Sallie Mae
The Farm Credit System (FCS) is an umbrella
organization under which numerous lending institu
tions and affiliated service and other entities provide
credit to the agricultural sector. The system’s banks
and associations provide credit and related services
to farmers, ranchers, producers and harvesters of
aquatic products, rural homeowners, certain farmrelated businesses, agricultural and aquatic
cooperatives and rural utilities. The system is com
posed of 12 Farm Credit districts that serve bor
rowers in all 50 states and Puerto Rico. Eleven of
12 districts have Farm Credit Banks, which pro
vide funds for long-term mortgage loans to farmers
and ranchers, and supervision and support services
to other affiliated institutions and associations. In
addition, three federally chartered Banks for Cooper
atives provide credit and leasing services to
agricultural cooperatives, rural utility systems and
other eligible customers. Systemwide assets totaled
$64 billion at year-end 1989.
Because the institutions and associations of the
system are cooperatively owned by their borrowers,
all borrowers must be stockholders of the system
institution from which they borrow. FCS activities
are funded through the sale of systemwide debt
securities that are the joint and several obligations
of the Farm Credit Banks and the Banks for
Cooperatives.3 Other funding is provided from the
sale of consolidated systemwide notes and bonds.
At year-end 1989, the system had $57 billion in
publicly traded debt securities outstanding.
Farmer Mac, created in 1987 when the FCS
was restructured following a government bailout,
provides a secondary market for agricultural real
estate loans with federally backed credit enhance

As with the housing GSEs, Sallie Mae was
established to provide a secondary market for
guaranteed student loans (GSLs). Prior to the crea
tion of Sallie Mae, very few lending institutions
participated in the Guaranteed Student Loan Pro
gram (GSLP) because GSLs are relatively illiquid,
long-term assets whose interest rates are set by the
federal government, often at below-market rates.
Sallie Mae assists funding for higher education
through two primary activities: 1) the purchasing
of loans guaranteed by the federal government or
indirectly guaranteed through state or nonprofit
agencies with federal reinsurance and 2) col
lateralized lending to financial institutions and
other GSLP participants to finance student loans
(called warehousing advances). Sallie Mae services
(collects interest and principal payments) approx
imately half the loans it purchases.
Sallie Mae experienced very rapid growth in
the 1980s, with its assets rising from $9.1 billion
at year-end 1983 to $35.5 billion at year-end 1989.
As of year-end 1989, Sallie Mae had purchased
from 1,600 lenders the student loans of approx
imately four million borrowers. Sallie Mae finances
its activities through sales of debt securities; at
year-end 1989, Sallie M ae’s outstanding debt was
$34.5 billion, with slightly more than half of the
debt in the form of long-term notes.

The Issues
Because of the special ties the privately owned
GSEs have to the federal government, the market

ives these GSEs to have implicit government
ng. Investors in GSE debt or GSE-guaranteed
securities assume Congress would use taxpayer
funds to prevent a GSE failure. This market per
ception allows GSEs to borrow money at rates just
slightly higher than what the U.S. Treasury pays
for funds and increases the incentives for GSEs to
seek greater returns by assuming more risk. The
asymmetry between GSEs’ cost of funds and ex
pected returns exists because returns flow to stock
holders, while losses in excess of capital are ulti
mately incurred by taxpayers. Thus, the gains
from excessive risk are “ privatized,” while the
losses are “ socialized.”
The rapid growth of these GSEs is another
area of concern. During the 1980s the amount of
GSE securities outstanding increased at a 19.2 per

FOOTNOTES
’ United States Office of Management and Budget.
“ Recognizing Federal Underwriting Risks,” The Budget
of the U.S. Government, Fiscal Year 1991, (1990). In adon to the budget, the following two documents were
Id extensively in researching this article: United
les Department of Treasury, Report of the Secretary
of the Treasury on Government Sponsored Enterprises
May 1990 and “ U.S. Government-Sponsored Enter
prises (GSEs),” Moody’s Special Comment (February
1990).

•

cent annual rate, and stood at $863 billion at yearend 1989. To finance this growth, GSEs have been
borrowing funds at an increasing rate, and this
borrowing is expected to exceed federal borrowing
in fiscal 1991. This tremendous growth in out
standing debt has raised concerns about the lever
age of GSEs. High debt-to-assets ratios imply a
greater risk of loss if an industry experiences a
downturn; because GSEs cannot diversify their
operations given their federal mandate, their pro
fitability is highly dependent on the health of the
industry they represent as well as general econom
ic conditions. Many policymakers believe GSEs
are under-capitalized, thus increasing the magni
tude of losses in the event of insolvency. These
issues, and recommendations to mitigate the risk of
losses from GSE activities, will be addressed in
the December 1990 edition of Pieces of Eight.

2See Michelle A. Clark. “ Competition Heats Up in the
Home Mortgage Market,” Pieces of Eight, (March 1990),
pp. 9-13 for a detailed discussion of the workings of the
pass-through securities market.
3ln this case, a “ joint and several obligation” permits a
debt-holder to sue either agency or the two jointly in
case of default. If just one agency is sued, that agency
can sue the other for its share of the liability.

Realizing the Delta’s
Economic Potential
by Thomas B. Mandelbaum
Thomas A. Pollman provided research assistance.

1988, Congress established the Lower
Mississippi Delta Development Commission to
make recommendations regarding the economic
needs, problems and opportunities in the Lower
Mississippi Delta, the nation’s poorest region.
Most of the Delta region, which includes 219
counties in seven states along the banks of the
Mississippi River, can be found within the boun
daries of the Eighth Federal Reserve District (see
map). This article discusses the Delta’s current
economic conditions and the Commission’s recom
mendations for improving them, as outlined in The
Delta Initiatives, the Commission’s final report
that was released in May 1990.

Historical Roots
The economic development of the Delta region
reflects its geography. Agriculture, one of the
region’s dominant industries, has been fostered by
the long growing seasons and fertile soils on the
banks of the Mississippi River. The plantation
farming system that once existed was labor-in
tensive, taking advantage of the services of slaves
and tenant farmers. As farming became increasingly
mechanized, particularly in the second half of this
century, many farm workers were no longer needed.
While many moved to industrial centers throughout
the nation, others remained in rural areas and ex
perienced unemployment and poverty, conditions
that still exist. In addition to a large agriculture
sector, the Delta economy is characterized by pro
duction of basic manufactured goods such as food
products, apparel, appliances and automotive parts.
The economic geography of the Delta is domi
nated by the Mississippi River. The Mississippi
River has long promoted trade among the nation’s
regions; however, only five bridges span the river
between Memphis and Baton Rouge, hindering intraregional trade. Historically, the states have com
peted for footloose industries rather than worked to
gether to improve conditions. The Commission is
one of the first serious attempts to adopt a coopera
tive approach to the region’s economic development.

Current Conditions
Although per capita income in the Delta rose
faster than the national average between 1970 and

1980, the region’s average income remains re la ^ ^ B
tively depressed and poverty is widespread. A c -^ ^ ^
cording to the 1980 Census, 20.9 percent of the
Delta population was below the poverty level,
substantially more than the U.S. average of 12.4
percent and even higher than Appalachia’s 17 per
cent.1 In some Delta areas, conditions are substan
tially worse. Almost 53 percent of the population
of Mississippi’s Tunica County were in poverty,
making that county the nation’s poorest. The
poverty rate among the Delta’s sizable African
American population was 41.6 percent versus 29.9
percent nationally.
Since 1980, per capita income in the Delta has
fallen even further below that in the rest of the na
tion, dropping from 79.9 percent of the national
average in 1980 to 75.1 percent in 1988. The
poverty of the Delta region is reflected in the liv
ing conditions. Relatively few physicians and
registered nurses serve the Delta’s residents. The
region’s 1984 infant mortality rate of 12.5 deaths
per 1,000 births compares with a 10.7 national
rate. The rate among African Americans in the
Delta region is even higher, exceeding 18 deaths
per 1,000. Because economic development requires
a healthy work force, these health conditions are
thought to have hindered efforts to improve eco
nomic conditions.
A recurring theme in the Commission’s repJ
which is related to the Delta’s health conditions,'
that the low educational attainment and skill levels
of Delta workers limit income growth, productivity
and economic development efforts. The 1980 Cen
sus indicated that only 55.5 percent of Delta resi
dents aged 25 years or older had graduated from
high school, compared with 66.5 percent national
ly. Almost 26 percent of Delta residents drop out
of high school, compared with 20 percent national
ly. Not surprisingly, the Delta region has one of
the highest illiteracy rates in the nation. One factor
undoubtedly contributing to the poor educational
results is that educational expenditures per student
in the Delta were 20 percent lower than the na
tional average in 1982.
In light of the low income in the Delta, it is not
surprising that the Delta’s physical infrastructure is
also below average. According to the 1980 Cen
sus, slightly more than a third of Delta housing
units were defined as substandard, almost twice the
U.S. rate.2 Also, many highways, roads and
bridges are in poor condition.

Recommendations
In general, the Commission feels that to impr
conditions in the Delta it is essential to improve
education, develop leadership among Delta resi
dents and change attitudes that have long held back

I
igure 1

The Eighth Federal Reserve District and the Lower Mississippi Delta
The Lower Mississippi Delta includes
the following counties and parishes:

•

Arkansas
Arkansas
Ashley
Baxter
Bradley
Calhoun
Chicot
Clay
Cleveland
Craighead
Crittenden
Cross
Dallas
Desha
Drew
Fulton
Grant
Greene
Independence
Izard
Jackson
Jefferson
.Lawrence
e
firincoln
Lonoke
Marion
Mississippi
Monroe
Ouachita
Phillips
Poinsett
Prairie
Pulaski
Randolph
St. Francis
Searcy
Sharp
Stone
Union
VanBuren
White
Woodruff

Kentucky
Ballard
Caldwell
Calloway
Carlisle
Christian
Crittenden
Fulton
Graves
Henderson
Hickman
Hopkins
Livingston
Lyon
Marshall
McCracken
McLean
Muhlenberg
Todd
Trigg
Union
Webster

Illinois
Alexander
Franklin
Gallatin
Hamilton
Hardin
Jackson
Johnson
Massac
Perry
Pope
^Pulaski
Randolph
Saline
Union
White
Williamson

Louisiana
Acadia
Allen
Ascension
Assumption
Avoyelles
Caldwell
Catahoula
Concordia
East Baton Rouge
East Carroll
East Felicia
Evangeline
Franklin
Grant
Iberia
Iberville
Jackson
Jefferson
Lafourche
LaSalle
Lincoln
Livingston
Madison
Morehouse
Orleans
Ouachita
Pointe Coupee
Plaquemines
Rapides
Richland
St. Bernard
St. Charles
St. Helena
St. James
St. John the Baptist
St. Landry
St. Martin

y y y y t 1 Eighth District
|

ffff<

ft
\
3
\

Tangipahoa
Tensas
Union
Washington
West Baton Rouge
West Carroll
West Felicia
Winn

Mississippi
Adams
Amite
Attala
Benton
Bolivar
Carroll
Claiborne

Coahoma
Copiah
Covington
DeSoto
Franklin
Grenada
Hinds
Holmes

Humphreys
Issaquena
Jefferson
Jefferson Davis
Lafayette
Lawrence
Leflore
Lincoln
Madison
Marion
Marshall
Montgomery
Panola
Pike
Quitman
Rankin
Sharkey
Simpson
Sunflower
Tallahatchie
Tate
Tippah
Union
Walthall
Warren
Washington
Wilkinson
Yalobusha

Lower Mississippi Delta

Yazoo

Missouri
Bollinger
Butler
Cape Girardeau
Carter
Crawford
Dent
Douglas
Dunkin
Howell
Iron
Madison
Mississippi
New Madrid
Oregon
Ozark
Pemiscot
Perry
Phelps
Reynolds
Ripley
St. Genevieve
St. Francois
Scott
Shannon

Stoddard
Texas
Washington
Wayne
Wright
Tennessee
Benton
Carroll
Chester
Crockett
Decatur
Dyer
Fayette
Gibson
Hardeman
Hardin
Haywood
Henderson
Henry
Lake
Lauderdale
McNairy
Madison
Obion
Shelby
Tipton
Weakley

regional progress. More specifically, the Commis
sion presented 68 10-year development goals and
more than 400 recommendations. Since they were
released last May, these recommendations have
received considerable attention and are being stud
ied by the governments of the Delta states and by
U.S. government agencies, including the Depart
ment of Housing and Urban Development. A group
of congressmen from the Delta also meets regular
ly to discuss the status of the recommendations. A
few of the key recommendations are discussed in
the following sections.

Human Capital Development
There is broad agreement that it is essential to
improve the education and job skills of Delta
workers. In a study regarding Delta economic
development finance, for example, two researchers
report that bankers, local economic developers and
state officials repeatedly emphasized that “ without
an improvement in our human capital...more
money will do no good.” 3
Among the dozens of recommendations to im
prove the quality of education, the Commission
suggests that the federal government fund magnet
schools stressing mathematics and science in rural
areas and restructure federal grants to establish
services for low-income, rural students. States are
urged to create a regional magnet high school near
the National Center for Toxicological Research in
Jefferson, Arkansas, to take advantage of the
faculty expertise and research facilities; consider
lengthening the school year; and, because of the
shortage of math and science teachers, allow quali
fied non-teacher professionals to teach those sub
jects. In addition, the Commission urges states to
continue to restructure their educational programs
by emphasizing teacher professionalism and ac
countability, developing school-based management
and making curriculum more relevant.
The literacy and job skills of Delta workers
could be improved, according to the Commission,
if the U.S. Department of Labor and U.S. Depart
ment of Education would allow states and localities
more flexibility in the administration of federal
training programs, such as those provided by the
Jobs Training Partnership Act and Adult Basic
Education. In addition, the Commission urges the
enactment and funding of the National Literacy
Act of 1989. In many areas, the administration of
literacy training is scattered among a number of
state and local agencies, hampering the programs’
effectiveness. Therefore, the Commission urges
Delta states to develop a coordinated literacy en
hancement system to coordinate public, private and
volunteer programs. One recommendation suggests
that institutions of higher education form a
“ literacy corps” comprised of college students to
supplement existing organizations.

The Commission encourages further cooperatiol
among the Delta region’s 104 colleges and univer
sities so they can more effectively facilitate the
region’s economic development as well as compete
for public and private research funds. To this end,
a Summit on Higher Education is tentatively planned
for November 1990 in Memphis.

Encouraging Private Enterprise
Historically, the Delta has relied heavily on the
production of primary products, such as agricultur
al commodities, timber and raw materials. The
Delta’s private sector can be strengthened, accor
ding to the Commission, by diversifying its econo
my and expanding “ value-added processing,” that
is, operations that use the Delta’s primary products
to produce finished or intermediate products. Ex
amples include canneries and paper factories. To
encourage value-added processing, the Commission
suggests that Congress establish the Delta as a
development zone and enact policies that would re
quire that a certain percentage of federal expen
ditures in targeted value-added industries, such as
food processing, be bought from rural Delta coun
ties. Additionally, the federal government should
fund research for the development of value-added
industries in the Delta and institute tax incentives
for firms locating in rural Delta counties.
To spur growth in manufacturing, the Commis
sion recommends that Congress and Delta states
establish a regional “ cross-match program” that
helps match regional producers of goods and ser
vices with buyers. After establishing a comprehen
sive database, the program would furnish detailed
information on both potential markets for finished

products and potential suppliers for inputs within
the Delta to any interested Delta seller or buyer.
One expected result would be greater intraregional
trade.
The Commission suggests that the Delta’s eco
nomic expansion has been held back by a lack of
capital to finance business start-ups and expan
sions. Banks in the Delta region possess substantial
assets, almost $78 billion in 1989, but a compara
tively small proportion of these assets are loaned
to businesses and individuals: loans from Delta
banks equaled 73.6 percent of their assets, some
what less than the national average of 79.5 percent.
In rural parts of the Delta region, loan-to-asset
ratios are even lower; when the four counties that
contain Little Rock, Memphis, New Orleans and
Jackson, Mississippi, are removed, the Delta’s
loan-to-deposit ratio falls to 65.4 percent. The
relatively low ratios in the Delta are thought to
reflect the conservative lending practices of Delta
bankers and/or lower loan demand.
To make more capital available for investment in
the Delta, the Commission recommends the federal

vernment, in cooperation with state governments
hd the private sector, establish a regional devel
opment bank that guarantees local bank-financed
loans and provides equity, near equity and fixedasset financing for Delta businesses. Funds would
be targeted to assist small and minority businesses
and firms needing venture capital or export credit.

Promoting Tourism
Another potential source of economic growth is
tourism. The Delta region is rich in history and
natural beauty, but according to the Commission,
these attractions are not widely publicized or
developed. One program would establish and pro
mote an African American Heritage Trail, linking
existing historical sites and newly developed
cultural museums.

Conclusion
The Delta Initiatives provides a comprehensive
plan for improving conditions in the nation’s
poorest region during the next 10 years. Analyses
of many of the specific recommendations will unubtedly produce conflicting assessments as to
ir effectiveness in promoting economic developent. It is clear, however, that the poverty of the
Delta region is not a new phenomenon and, at
best, its eradication will take decades.
Many factors that influence the Delta’s econom
ic development are beyond the control of Delta
businesses, institutions and residents. National and
global economic changes have and will continue to

flk 1

FOOTNOTES
ppalachia refers to the Appalachian Regional Commison’s 90 target counties which are located in rural parts
of Alabama, Kentucky, Mississippi, North Carolina, Ohio,
Tennessee, Virginia and West Virginia.
Substandard housing lacks complete plumbing facilities
for exclusive use and/or central heating equipment.

affect economic activity in the Delta and will in
fluence the effectiveness of any specific policy ac
tions that are undertaken. Two economists suggest,
for example, that given the Delta’s concentration
in the production of goods that are sensitive to
changes in interest rates and imports, “ ...lower
national interest rates and a lower American dollar
could probably do more to benefit the region’s
economy than any other single action recommend
ed here or elsewhere.” 4
Numerous recommendations require the influx
of substantial expenditures or subsidies from Wash
ington. Given the current fiscal environment in
which Congress and the President are attempting to
cut federal expenditures by tens of billions of
dollars, it is likely that many of the proposals will
never be funded.
Many of the recommendations, however, do
not rely on outside forces but focus on how the
Delta can help itself. Some recommendations re
quire cooperation between state economic develop
ment agencies, universities and other institutions, a
contrast to the competition that has characterized
their relations in the past. Perhaps the most critical
recommendations are those that seek to improve
educational opportunities. As markets become in
creasingly global in scope and work becomes more
technical, a workforce that is literate and highly
skilled is essential. Though improvement in the
quality of labor is a necessary condition for the
Delta region’s economic development, it is not suf
ficient. Without a corresponding rise in the de
mand for this more highly skilled labor by new
and expanding firms in the Delta region, it is like
ly that many of the best-educated Delta workers
will leave for better opportunities elsewhere.

3Raymond C. Lenzi and Kenneth Pigg, “ Lower Mississip
pi Delta Economic Development Finance: A Proposal for
a Delta Development Bank,” Community Development
Department, University of Missouri-Columbia (February
23, 1990), p.1.
4lbid.

for purchasing items such as farm machinery and
implements.
The proportion of agricultural debt held by
various agricultural lenders in the Eighth District
and the United States is shown in table 1. In terms
of total agricultural lending, commercial banks are
the largest lenders, holding about 30 percent of
total agricultural debt in both the District and the
United States. This leadership position is a recent
development for commercial banks. During the
early 1980s, the Farm Credit System (FCS), a na
tionwide system of federally chartered agricultural
lending institutions cooperatively owned by their
borrowers, held the lead position in agricultural
lending, but lost that role in 1986 and 1987 in the
District and U.S. markets, respectively. The FCS
is now the second-largest lender in the U.S.
market, while the Farmers Home Administration
(FmHA), the “ lender of last resort” for farmers
and rural residents, is the second-largest lender in
the District.
Focusing on the real estate market, commercial
banks hold more debt than any other lender in the
District; however, the FCS is the largest real
estate lender in the United States. The FCS is the
second-largest real estate lender in the District and
individuals hold the second-largest amount of real
estate debt in the nation. With market shares ex
ceeding 10 percent, the FmHA and life insurance
companies are also important real estate lenders in
the District and the United States.
In the agricultural non-real estate market, the
FmHA is the largest lender in the District with
commercial banks following a close second. This
contrasts with the national market where commer
cial banks hold more than twice the amount of
loans held by their closest competitor, the FmHA.
Furthermore, the market share of non-real estate

Commercial Banks
Lead Agricultural
Lending
by Jeffrey D. Karrenbrock

David H. Kelly provided research assistance.

ommercial banks make more agricultur
al loans in both the Eighth Federal Reserve District
and the United States than any other financial in
termediary. This article briefly examines the market
share of agricultural debt held by commercial banks
and other large agricultural lenders. In addition,
the market share and ratios reflecting the perfor
mance of agricultural loan portfolios are analyzed
for two types of commercial banks: those whose
loan portfolios are more heavily oriented to agri
cultural lending and those that are not.

Agricultural Lenders
Agricultural debt, or loans outstanding, can be
separated into two categories: real estate and nonreal estate debt. Agricultural real estate debt in
cludes loans made to purchase agricultural land as
well as loans that are collateralized with agricultur
al land. Non-real estate debt is composed of pro
duction loans, which are used by farmers to finance
purchases of agricultural inputs, and other loans

Table 1
1988 Market Shares of Agricultural Debt
Eighth District1

United States

Total

Real
Estate

Non-real
Estate

Total

Real
Estate

Non-real
Estate

Banks

30.6

28.2

33.8

30.4

18.6

45.4

Farm Credit System

20.2

26.8

11.3

26.6

36.6

13.9

5.9

10.3

—

6.5

11.6

—

Farmers Home Admin.

26.7

18.0

38.4

16.3

11.6

22.3

Individuals

16.6

16.5

20.2

21.7

18.3

Life Insurance Companies

1Eighth District data is based on the aggregated data of Arkansas, Kentucky, Mississippi, Missouri and Tennessee.
SOURCE: Derived from data in the U.S. Department of Agriculture’s Economic Indicators of the Farm Sector: State
Financial Summary, 1988.

Table 2
Selected 1989 Statistics for Commercial Banks That Lend to Agriculture
Eighth District1
Agricultural
Banks

Loan Market Share
Total2
Non-real Estate
Real Estate
Performance Ratios3 —
Average 1984-89
Agricultural loan losses
Agricultural non-performing
loans
Performance Ratios3 — 1989
Agricultural loan losses
Agricultural non-performing
loans

United States

Non-agricultural
Banks

Agricultural
Banks

Non-agricultural
Banks

51.0%
53.0
48.9

49.0%
46.9
51.0

51.4%
54.8
45.0

48.6%
45.2
55.0

2.50

1.59

2.20

2.06

7.08

5.17

5.87

7.52

0.35

0.36

0.25

4.21

2.96

3.20

4.74

1District data includes all agricultural lenders within the boundaries of the map shown on the inside front cover of this
publication.
2Tota! loans equal non-real estate loans plus real estate loans.
3AII ratios are given as a percent of total production loans.
SOURCE: Derived from data provided by banks in the Federal Financial Institutions Examination Council’s Consolidated
Reports of Condition and Income.

debt held by the FmHA in the District is almost
twice its share in the nation. The disproportionate
role of the FmHA in the District stems from its
large role in Mississippi and Arkansas, where it
holds 63 percent and 38.2 percent of non-real
estate debt, respectively.

Commercial Banks
Given the importance of commercial banks as
an agricultural lender, their role merits closer ex
amination. For purposes of this article, commercial
banks lending to agriculture are further divided into
two groups of banks that are -termed agricultural
and non-agricultural. A bank is defined as an agri
cultural bank if the ratio of its agricultural loans to
total loans exceeds the average of such ratios at all
U.S. banks at year-end; otherwise the bank is a
non-agricultural bank. This distinction hinges on
the relative importance of agricultural loans in a
commercial bank’s portfolio of loans. In absolute
terms, however, some of the largest agricultural
lenders in the District and the United States are
not classified as agricultural banks. This is because
their loan volume in other areas, such as commer
cial and industrial loans, far outweighs their ex
posure to agricultural loans.

Market Share
Agricultural loan market shares held by agricul
tural and non-agricultural banks in 1989 are shown

in table 2. Total agricultural loans at commercial
banks are split almost evenly between agricultural
and non-agricultural banks in both U.S. and Dis
trict markets. Another similarity is that agricultural
banks tend to hold slightly more of the agricultural
non-real estate loans, while non-agricultural banks
hold a larger portion of loans collateralized with
agricultural real estate.
During the 1980s, agricultural banks lost market
share to non-agricultural banks. Between 1980 and
1989, Eighth District agricultural banks saw their
market share drop 7 percentage points in the agri
cultural loan market. This total market share decline
stemmed from market share losses in non-real
estate and real estate loans of 7.3 and 5.5 percen
tage points, respectively. U.S. agricultural banks
faced a similar situation as their market share of
total agricultural loans dropped 4.4 percentage
points. Unlike the District market, however, vir
tually all of their market share decline came from
market share losses in non-real estate loans.

Performance Ratios
Two ratios reflecting the performance of agricul
tural and non-agricultural banks’ agricultural loan
portfolios are shown in table 2. Agricultural loan
losses represent those loans that commercial banks
have written off as bad debt, while non-performing
loans are those loans that are 90 days or more
delinquent or in non-accrual status. Both ratios use

data on non-real estate loans only and are shown
as a percent of total agricultural non-real estate
loans. The average value of these ratios for 1984
to 1989 and their 1989 values are given in table 2.
In the District, non-agricultural banks had lower
average ratios for both agricultural loan losses and
non-performing loans over the five year period.
This contrasts with the U.S. market, where agricul
tural banks had a slightly higher average agricultur
al loan loss ratio, but a lower average agricultural
non-performing loan ratio than the non-agricultural
banks. These figures suggest, at least at the District
level, that non-agricultural banks did a better job
of managing their agricultural production loan port
folios from 1984 to 1989. It is important to realize,
however, that these current ratios are strongly in
fluenced by events happening prior to 1984. Thus,
the performance figures for 1984 to 1989 may be
affected either favorably or unfavorably by banks’
behavior prior to 1984. Different behavior between
agricultural and non-agricultural banks can affect
one’s assessment of the 1984-89 performance of
agricultural relative to non-agricultural banks.
Lacking the data to examine the relative perfor
mance of these banks prior to 1984, some caveats
in interpreting the performance ratios are in order.
During the downturn in the agricultural econo
my that occurred in the late 1970s and early
1980s, non-performing loans and loan losses began
to grow at financial institutions. A simple example
can illustrate how banks’ timing of writing off bad
debts could affect the average ratios reported in
table 2. Assume agricultural and non-agricultural
banks had similar levels of bad loans in the early
1980s and that non-agricultural banks wrote off
their bad loans before 1984, while agricultural
banks waited until the mid-1980s to start to write
off their bad debt. In this case, non-agricultural
banks would tend to have a lower ratio for loan
losses than agricultural banks during the 1984 to
1989 period. This would give the impression that
the non-agricultural banks had better managed their
agricultural production loan portfolios in the 1984
to 1989 period, even though both groups of banks
may have had similar amounts of bad debt during
the entire decade.
Differences in the timing of write-offs would
also affect the non-performing loan ratios. Once
banks charge off a bad loan, the loan is no longer
classified as non-performing. To continue the
above example, if the non-agricultural banks wrote
off their bad debt in the early 1980s, their volume
of non-performing loans would also have declined
in this period. Having eliminated these non-per
forming loans from their books in the early 1980s
would mean a lower non-performing loan ratio in
the mid-to-late 1980s for non-agricultural banks.
A second factor that affected the performance
ratios is the volume of non-real estate loans at the

banks from 1984 to 1989. Recall that the ratios
presented in table 2 are simply the percentage of
loan losses and non-performing loans to total nonreal estate loans. If the volume of non-real estate
loans were to increase (decrease) at a given type
of bank, this would lower (increase) these ratios,
assuming no change in loan losses or nonperform
ing loans resulted from the increase (decrease) in
loans. Both agricultural and non-agricultural banks
in the District and the United States had lower
non-real estate loan volumes in 1989 than in 1984,
which put upward pressure on their performance
ratios. However, non-real estate loans at agricul
tural banks fell 26.2 percent and 27.2 percent in
the District and nation, respectively, while non-real
estate loans at non-agricultural banks only fell 12.6
percent in the District and 14.9 percent in the na
tion between 1984 and 1989. Thus, the upward
pressure on the banks’ performance ratios was
relatively less for non-agricultural banks during the
late 1980s.
These two performance ratios were at their
highest values between 1985 and 1986 for both
types of banks in the District and the United
States. During this time, loan losses were running
between 2.7 percent and 4.7 percent, while non
performing loans were running between 6.6 per
cent and 10.8 percent of total non-real estate
loans. Since the mid-1980s, these ratios have im
proved each year. The 1989 values indicate how
much these ratios have improved since the mid1980s. Agricultural loan losses have declined to
less than 0.4 percent of all production loans and
non-performing loans are less than 5 percent for
both types of banks in the District and the United
States. This improvement in the agricultural pro
duction loan portfolio has been largely a function
of the improved agricultural economy during the
last half of the decade.

Summary
Commercial banks hold the largest share of total
agricultural debt in both the United States and the
Eighth Federal Reserve District. Other financial in
stitutions, however, play important roles in the in
dividual real estate and production loan markets.
Agricultural loans at commercial banks are split
almost evenly between agricultural and non-agri
cultural banks. In the District, non-agricultural
banks’ agricultural loan portfolios outperformed
agricultural banks’, in terms of loan losses and
non-performing loans, during the 1984 to 1989
period. These measures of performance, however,
are affected by loan write-offs prior to 1984.
Finally, the agricultural loan portfolios of all com
mercial banks, on average, have improved signifi
cantly since the mid-1980s in both the District and
the United States.

eighth District Business
Level

11/1990

Payroll Employment ( th o u sa n d s )
United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis
M anufacturing
Employment ( th o u sa n d s )
United States
District
Arkansas
Kentucky
Missouri
Tennessee
District Nonmanufacturing
Employment ( th o u sa n d s )
Mining
Construction
R E 2
^an sportation3
Services
Trades
Government
Real Personal Income4 ( b illio n s )
United States
District
Arkansas
Kentucky
Missouri
Tennessee

C o m p o u n d e d A n n u a l R a te s o f C h a n g e

1/199011/1990

11/198911/1990

1989’

19881

110,699.0
6,878.9
915.2
248.9
1,462.2
479.9
2,327.4
1,184.7
2,174.1
465.4

1.7%
-1 .5
1.9
-1 .9
-2 .4
-1 .7
-1 .1
-1 .8
-2 .8
-1 .1

2.2%
1.6
3.0
2.1
2.5
3.0
1.0
1.1
1.1
1.5

2.8%
2.9
3.0
3.0
3.8
4.1
2.2
2.3
3.0
1.5

3.3%
3.5
3.5
3.5
4.1
3.1
2.8
2.3
4.0
7.3

19,382.0
1,473.5
231.1
285.2
436.9
520.3

- 0 .6 %
-1 .6
1.0
1.3
-0 .1
-5 .5

- 1 .4 %
-0 .3
0.3
0.4
-0 .7
-0 .5

1.1%
2.0
1.6
3.6
1.2
1.8

2.0%
3.2
3.1
4.5
2.3
3.4

49.6
294.9
338.0
397.9
1,546.5
1,644.8
1,131.3

- 0.8%
- 1 5 .0
-2 .2
-1 .3
-1 .1
-4 .0
3.5

- 0 .6 %
1.9
0.5
0.1
3.4
1.3
3.2

- 4 .8 %
1.0
0.3
3.5
5.1
3.0
2.2

- 5 .3 %
0.3
0.5
4.3
6.3
3.7
2.4

1/1990

IV/19891/1990

1/19891/1990

19891

19881

$3,545.6
196.3
26.2
42.2
68.7
59.2

- 0 .2 %
2.9
20.6
5.9
-1 .7
-0 .7

1.6%
1.5
1.9
1.7
1.2
1.5

2.5%
2.2
2.0
2.5
1.9
2.4

3.4%
2.8
2.9
2.8
2.1
3.6

11/1990

1/1990

1988

1987

5.3%
5.3
6.8
5.9
5.7
4.9
4.8
5.1
5.0
4.6

5.2%
5.7
6.4
5.5
6.0
5.4
5.8
5.9
5.1
4.4

5.5%
6.5
7.7
6.4
7.9
6.3
5.7
5.9
5.8
5.2

6.2%
7.2
8.1
7.1
8.8
6.9
6.3
6.5
6.6
5.7

L e v e ls

Unemployment Rate
United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis

1989

5.3%
5.8
7.2
6.3
6.2
5.6
5.5
5.5
5.1
4.7

Note: All data are seasonally adjusted. On this page only, the sum of data from Arkansas, Kentucky, Missouri and Tennessee
is used to represent the District.
^ fc u re s are simple rates of change comparing year-to-year data.
^ n a n c e , Insurance and Real Estate
^Transportation, Communications and Public Utilities
4Annual rate. Data deflated by CPI-U, 1982-84=100.

U. S. Prices
Level

C o m p o u n d e d A n n u a l R a te s o f C h a n g e
1/1990-

11/1989-

11/1990

19891

19881

128.9
131.5

3.8%
1.5

4.5%
5.4

4.7%
5.8

4.0%
4.1

152.0
172.0
131.3

7.4%
3.1
13.2

2.5%
10.3
- 6 .4

7.0%
6.7
7.2

8 .8 %

169.0
183.0

2.4%
4.5

1 .2 %
3.4

6 .2 %
4.4

Consumer Price Index
( 198 2 - 8 4 = 100 )

Nonfood
Food
Prices Received by Farm ers
(1 9 7 7 = 100 )

All Products
Livestock
Crops

2.7
18.3

Prices Paid by Farm ers
(1 9 7 7 = 100 )

Production items
Other items2

6.9%
4.4

Note: Data not seasonally adjusted except for Consumer Price Index.
1Figures are simple rates of change comparing year-to-year data.
2Other items include farmers’ costs for commodities, services, interest, wages and taxes.

Eighth District Banking______________
Changes in Financial Position for the year ending
March 31, 1990 (by Asset Size)
L ess th an
$ 1 0 0 m illio n

SELECTED ASSETS
Securities
U.S. Treasury &
agency securities
Other securities1
Loans & Leases
Real estate
Commercial2
Consumer
Agriculture
Loan loss reserve
Total Assets
SELECTED LIABILITIES
Deposits
Nontransaction accounts
MMDAs
$100,000 CDs
Demand deposits
Other transaction accounts3
Total Liabilities
Total Equity Capital

-2.30/O
- 0 .2
-9 .0
0.2
2.8

-9 .0
0 .8

7.0
- 0 .6
-0 .4
- 0 .3 %
0.4
- 1 2 .4
4.3
-4 .7
- 0 .6
-0 .4
0.2

$ 1 0 0 m illio n -

$ 3 0 0 m illio n -

M o re th a n

$ 3 0 0 m illio n

$1 b illio n

IO.6 O/0
15.2
0.5
6.7
9.2
- 1.0
7.1
28.1
13.5
8.5
9.0%
11.1
0 .2

7.8
0.7
5.8
8 .6
8.1

7.00/0
13.3
-6 .5
14.3
24.4
5.9
12.7
30.8
14.6

28.7
-2 .4
5.3
13.6
1.5
6.5
-3 .1

11.2

6.7

10.9%
13.1
4.2
4.7
2.4
9.9

3.40/o

12.2

6.2

18.7
- 11.8
-3 .9
0 .8

11.0

6.5

13.3

10.8

Note: All figures are simple rates of change comparing year-to-year data. Data are not seasonally adjusted.
includes state, foreign and other domestic, and equity securities
includes banker’s acceptances and nonfinancial commercial paper
includes NOW, ATS and telephone and preauthorized transfers

18.50/o

Performance Ratios

(by A s s e t size )
E ig h th D is tric t
1/90

EARNINGS AND RETURNS
Annualized Return on Average
Assets
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks
Annualized Return on Average
Equity
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks
Net Interest Margin1
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks
ASSET QUALITY2
Nonperforming Loans3
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks

1.08%
1.05
1.05
.78
—

1/89

1.13%
1.08
1.14
.90
—

U n ite d S ta te s
1/88

1.08%
1.04
1.08
.86
—

1/90

I/8 9

I/8 8

.82%
.97
.84
.70
.75
1.05

.92%
1.04
.93
.95
.93
1.14

.74%
.83
.66
.72
.54
1.01

1.21

1.24

1.17

11.66%
12.84
13.12
11.90

12.42%
13.17
14.59
13.52

11.96%
12.69
13.69
13.35
—
12.26

8.98%
12.12
11.28
10.76
15.10
10.86

10.29%
13.02
12.94
14.61
17.85
12.02

8.420/0
10.68
9.55
11.59
12.21
10.83

3.92%
3.91
3.98
3.62

4.27%
4.56
4.51
4.27
3.52
4.14

4.24%
4.19
4.15
4.09
3.30
4.03

—

12.36
3.99%
3.96
4.13
3.66

—

13.00
4.01%
4.04
4.17
3.82

3.89

3.93

3.85

4.15%
4.33
4.35
4.23
3.23
4.00

1.68%
1.66
1.42
1.90

1.70%
1.73
1.52
1.92
—
1.96

2.10%
1.93
1.61
2.46
—
2.66

2.08%
2.03
2.44
2.46
4.61
2.24

2.88%
1.88
2.59
1.90
4.63
2.50

2.69%
2.24
2.44
2.40
5.31
3.30

1.48%
1.42
1.38
1.65

1.51%
1.34
1.36
2.15
—
1.90

1.56%
1.49
1.71
1.96
3.82
2.07

1.53%
1.47
1.64
1.69
3.62
2.13

1.670/o
1.55
1.69
1.91
4.36
2.16

.08%
.08
.08
.19
—
.08

.10%
.10
.16
.35
.45
.07

.120/o
.12
.16
.19
.20
.09

.16%
.13
.15
.23
.26
.15

—

1.81

Loan Loss Reserves
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks

1.47%
1.51
1.38
1.69
—
1.74

Net Loan Losses4
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks

.07%
.08
.10
.21
—
.04

—

1.89
.07%
.10
.07
.10
—
.04

—

Note: Agricultural banks are defined as those with 25 percent or more of their total loan portfolio in agriculture loans.
11nterest income less interest expense as a percent of average earning assets
2Asset quality ratios are calculated as a percent of total loans.
3Nonperforming loans include loans past due more than 89 days, nonaccrual, and restructured loans.
4Loan losses are adjusted for recoveries.

Resolving the Thrift
Crisis-A FIRREA
Update
by Michelle A. Clark

j
over one year has passed since President
Bush signed the Financial Institutions Reform,
Recovery and Enforcement Act (FIRREA).
Although the legislation addressed a variety of
issues facing U.S. financial institutions, its main
thrust was a “housecleaning” of the savings and
loan (thrift) industry. Over the course of the 1980s,
the industry incurred massive losses and failures
arising from local recessions, fraud, mismanage
ment and a regulatory structure that encouraged ex
cessive risk-taking. Although estimates of the clean
up’s ultimate cost vary substantially, most estimates
are in the $130 billion to $500 billion range. As of
August 1990, the industry consisted of almost 2,700
institutions in various stages of financial health, a
breakdown of which is detailed below.

State of the Thrift Industry
Number of Institutions by Category
August 1990
Well capitalized
and profitable
( 1, 175)

Meet or expected
to meet capital
requirements
(680)

Less than one-half of all thrifts are currently
categorized as healthy, that is, well-capitalized and
profitable, by the Office of Thrift Supervision
(OTS). An additional 25 percent already meet or
are expected to meet new minimum capital re
quirements in the near future. Absent a protracted
economic downturn, the OTS expects these two
groups of thrifts to survive the industry restructur
ing. The remaining third of the industry consists of
troubled institutions and those already seized or ex
pected to be seized by the government.
In addition to provisions that restructured the
regulatory oversight and allowable activities of
thrifts, a number of FIRREA’s provisions facilitated
the closure or sale of insolvent thrifts. To that end,
the Resolution Trust Corporation (RTC) was
established. The RTC is responsible for managing
and disposing of bankrupt thrifts and for selling the
repossessed real estate acquired by the now-defunct
Federal Savings and Loan Insurance Corporation
(FSLIC). The RTC was given three years starting
in 1989 to liquidate or sell insolvent thrifts that
were once insured by FSLIC and that are in con
servatorship (federally operated) or receivership
(closed). The agency has an additional four years
to dispose of acquired assets, such as residential
and commercial mortgages. The RTC’s toughest
task will be selling so-called “white elephant” pro
perties, many of which are located in the country’s
softest real estate markets.
As of August 27, 244 thrifts in 36 states and
Puerto Rico were in RTC conservatorship. These
federally controlled thrifts had $144 billion in assets
and $118 billion in deposits as of year-end 1989.
California and Texas, with 76 thrifts between them
in the conservatorship program, account for about
a third of all thrifts in conservatorship and more
than a quarter of the total assets of thrifts in the
program. In contrast, just 21 of the thrifts in con
servatorship are located within the Eighth District;
their combined assets amounted to 3.5 percent of
the U.S. total. Within the District, Arkansas thrifts
appear to be the most troubled, as almost a quarter
of the state’s thrifts are in conservatorship. The
state-by-state breakdown for the District is as
follows:

Eighth District Thrifts in RTC Conservatorship

State

In RTC
Conserva
torship
(244)

Expected to
be seized
by RTC
(246)

Troubled with
poor earnings
and low capital
(352)

Source: Office o f Thrift Supervision: Resolution
Trust Corporation

AR
IL
IN
KY
MO
MS
TN
TOTAL

Number in
Conservatorship

Total Assets
(in US$ millions)

9
6
0
1
2
3
0

$2,588
1,281

$5,018

—

50
714
385
—

SOURCE: Resolution Trust Corporation Fact Sheet,
August 27, 1990.

Full text of Pieces of Eight : Pieces of Eight : An Economic Perspective on the 8th District, September 1990

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