Abstract
PurposeFollowing the recent global financial crisis, US regulatory agencies issued laws to implement the Basel III accords to ensure the resiliency of the US banking sector. Theories predict that enhanced regulations may alter credit issuance of the regulated banks due to increased capital requirements, but the direction of changes might not be straightforward especially with respect to the agricultural loans. A decrease in credit availability from banks might pose a serious problem for farmers who rely on bank credit especially during economic recessions. The paper aims to discuss these issues.Design/methodology/approachIn this study, the impact of Basel III regulatory framework implementation on agricultural lending in the USA is examined. Using panel data of FDIC-insured banks from 2008 to 2017, the agricultural loan volume and growth rates are examined for agricultural banks and all US banks.FindingsThe results show that agricultural loan growth rates have slowed down, but the amount of agricultural loan volume issuance still remained positive. More detailed examination finds that regulated agricultural banks have decreased both the agricultural loan volume and their loan exposure to the agricultural sector, showing a possible sign of credit crunch.Originality/valueThis study examines whether the implementation of the Basel III regulation has resulted in changes in agricultural loan issuance by US banks as predicted by the lending channel theory.
Highlights
The financial crisis of 2007–2008 triggered significant regulatory changes for lending institutions around the world
This study examines whether the implementation of the Basel III regulation has resulted in changes in agricultural loan issuance by US banks as predicted by the lending channel theory
The direction of the change was not expected to be straightforward as agricultural loans received the same risk rating under the new regulation while other types of loans were categorized into different risk levels or higher risk levels
Summary
The financial crisis of 2007–2008 triggered significant regulatory changes for lending institutions around the world. The Basel III regulation requires banks to secure safer capital while recalculating the risk level of existing assets, effectively forcing banks to issue loans more conservatively. Gavalas (2015) finds that higher capital requirements raise the marginal cost of Basel III bank funding and increase lending rates in Europe Despite these findings, the theoretical regulation on framework of the bank lending channel and the empirical findings have been questioned in the literature. To our knowledge, Brester and Watts (2019) is the only study to examine the implications of the Basel III in the US agricultural lending context, with results showing significant relationships between the capital reserve requirements and banks’ return on equity and between diversification and reserve levels. These banks held significantly more agricultural loans, with an average of $46.65m per bank
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