Robert L. Clarke, the new Comptroller of the Currency, said yesterday that a way should be found to permit farm banks to diversify by purchasing portions of loans originally made by money-center banks.
Many giant U.S. banks, like Citibank and Bankers Trust Co. of New York, regularly sell loan "participations" to other institutions.
But the participations are generally in amounts of $1 million or more, too big for relatively small farm banks to afford. The small-sized participations that might interest a farm bank would not be appealing to the large banks that regularly sell portions of their loans.
Clarke suggested that some sort of "middleman" institution would have to buy a big loan participation from a money-center bank and break it down into smaller portions that could be sold to tiny rural banks.
Clarke, a Texas lawyer who became chief regulator of the nation's 4,700 nationally chartered banks last month, said that "bankers' banks" already exist in a number of states and could perform the intermediary role for loan participations. These institutions serve only other banks, for which they perform chores such as clearing checks and data processing.
Farm banks, once considered among the healthiest groups in the U.S. banking industry, have been failing at a record rate in recent years because of the economic crisis in agriculture.
Unlike banks in bigger cities that can make loans to a large number of largely independent borrowers, rural institutions rely on the economic health of the farms. Because even nonfarm businesses such as retailers or car dealers are almost totally dependent upon their farm customers, nearly all loans that a farm bank makes are agriculture-related.
The Federal Deposit Insurance Corp. has 1,141 banks on its list of troubled banks, and about half of them are agricultural banks.
Clarke said that most farm banks are liquid -- that is, they have plenty of deposits -- but are being forced to write off as losses increasing numbers of their loans. Because nearly all their loans are agriculture-related, they have no other sources of earnings to offset their losses on farm loans.
As a result, the banks have been forced to deduct loan losses from their capital -- investor equity in the banks and the reserves the banks have built up in earlier, more profitable years as a cushion against loan losses. "These banks are running out of capital," Clarke said.
By permitting them to participate in loans made by big money-center institutions, the farm banks could spread their risks -- earning money on nonfarm loans. Now, because farm banks are finding it difficult to make good loans, they are placing their excess deposits in low-yielding assets such as Treasury securities that are safe but do not return enough profit to offset losses on other loans.
Clarke said he has talked to money-center banks about the idea and said these institutions are receptive to the notion of selling their loan participations to bankers' banks. The money-center banks "are looking for buyers for their loans. They don't care who the buyer is."
He called a bankers' bank a "perfect vehicle" for buying and breaking down big loan participations and selling them to its rural bank customers. Clarke said he has not talked to officials of bankers' banks -- many of which are located in the agricultural states where farm problems are acute -- but said executives of agricultural banks also have been receptive to finding ways to diversify their portfolios.
Economists predict another difficult year on the farm and a continuing wave of failures of rural institutions. Last year, 120 banks failed -- most of them tiny and many of them farm banks. L. William Seidman, chairman of the Federal Deposit Insurance Corp., has predicted that a similar number will fail this year.