Hawke Warns Bankers About Agriculture

February 21, 2000

Comptroller of the Currency John D. Hawke, Jr., has warned bankers they must practice creative risk management to weather the storms ahead for the agricultural economy. He predicted credit risk in agricultural lending will increase this year.

Speaking to bankers and bank examiners at a conference in St. Louis, MO, Hawke cited a number of "downward indicators": a recent Office of the Comptroller of the Currency (OCC) survey that predicts credit risk in agricultural lending will increase this year, the Asian recession, foreign competition, recent droughts, a strong dollar and "silos bulging with years of surplus." All are putting pressure on the agricultural industry, he said.

"At a time of remarkable growth in the nonfarm economy - with most Americans enjoying record prosperity - net farm income was down last year," he said, "the second year in a row." At the same time, many of the traditional benchmarks of bank health, such as increased earnings, strong loan growth, good asset quality and capital, are at historically high levels among farm banks compared to the troubled period in agricultural lending in the 1980s.

Hawke said farmers are substantially less leveraged today than in the early 1980s and that farm debt now, adjusted for inflation, is at the same level it was in 1965. He encouraged bankers to work with agricultural borrowers who may be experiencing temporarily difficulties so that credit is not unduly restrained.

"Farmers may be able to ride out the hard times if they are able to obtain the financing they need to tide them over until better times return," he added.

OCC bank examiners should take into account prudent efforts by bankers to work with troubled farm borrowers when classifying credit risk, Hawke said. He advised examiners to weigh carefully the full range of relevant factors affecting the condition of farm credit and said they should not automatically criticize loans solely because of negative cash flows, a borrower. s need for more time to service loans or because previous debt had been carried over.

"If we get it right ... we can avoid both unnecessary overreaction to adverse conditions and the excessive latitude that can lead to more serious problems later on," he said.