Interaction Effects on Rural Financial Intermediaries of Financial Stress and Deregulation

Abstract

The events of the last decade and a half clearly signify the close relationship that rural financial intermediaries in the United States have to the combination of forces in financial markets and agriculture. This relationship has a long history, but the recent times have accentuated it. The 1970s witnessed a generally strong, although uneven, performance in agriculture and significant growth in loan demand by farmers. The lending capacities of agricultural banks and other lenders experienced heavy pressure, and fund availability for agriculture received much attention. Along with high inflation, financial innovations, and other factors, these conditions contributed to the significant regulatory changes affecting financial markets (Barry). Then, in the 1980s came the increasing financial adversities of agriculture, in part from financial market forces, and subsequent adversities for rural intermediaries, especially the more specialized ones of smaller size located in geographically limited markets. By the mid-1980s many rural intermediaries had joined the plight of farmers in seeking responses to these adverse conditions. In this paper we begin by reviewing the joint effects of interest rate deregulation and borrower stress on a financial intermediary using a portfolio theory framework. Then we consider the options for countering these risks, emphasizing the possible gains in risk bearing from broadening the geographic scope of agricultural lending markets. Empirical data on variability of net farm income are used to illustrate these gains and to consider their implications. Effects of Deregulation and Stress