Abstract
Interest in variable rate loan programs has increased in recent months, primarily as a result of disintermediation of financial institutions engaged in housing finance. This periodic feast or famine cycle of funds available for residential construction occurs when short term interest rates rise above the legal maximum rate payable on deposits by such institutions. Variable rate loan programs have existed for years in the business and agricultural financial sectors. To a lesser degree, variable rate mortgage programs have existed in a few financial institutions engaged in housing finance. A considerable body of experience in variable rate mortgage financing exists in foreign countries such as in Australia, Britain, Sweden, France, Germany, and Italy [2, pp. 5-6]. This study briefly examines the theoretical effects of variable rate loan programs on financial institutions and analyzes empirical data on the Farm Credit System, which has the largest domestic variable rate loan program. It is shown that the effect of such a program varies substantially as a result of the type of rate adjustment mechanism used (variable maturity vs. variable payment) and the asset maturity/liability maturity mix of the institution. The effect of interest rate changes in terms of risk depends to some degree on the maturity structure of the asset portfolio.
Published Version
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