Bank Risk Ratings and the Pricing of Agricultural Loans

Finance and Economics Working Paper No. 2003-53

39 Pages Posted: 28 Dec 2003

See all articles by Nicholas Walraven

Nicholas Walraven

Board of Governors of the Federal Reserve System

Peter J. Barry

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Date Written: September 2003

Abstract

In this paper, we review the prevalence of the use of risk ratings by commercial banks that participated in the Federal Reserve's Survey of Terms of Bank Lending to Farmers between 1997 and 2002. We find that adoption of risk rating procedures held about steady over the period, with a little less than half the banks on the panel either not using a risk rating system, or reporting the same rating for all their loans in the survey. However, most of these banks were small, and roughly four-fifths of all sample loans carried an informative risk rating. We found that after controlling for the size and performance of the bank and as many nonprice terms of the loan as possible, banks consistently charged higher rates of interest for the farm loans that they characterized as riskier, with an average difference in rates between the most risky and least risky loans of about 1-1/2 percentage points.

Keywords: Agricultural finance, agricultural loans, risk ratings

JEL Classification: Q14, G21

Suggested Citation

Walraven, Nicholas A. and Barry, Peter J., Bank Risk Ratings and the Pricing of Agricultural Loans (September 2003). Finance and Economics Working Paper No. 2003-53, Available at SSRN: https://ssrn.com/abstract=481622 or http://dx.doi.org/10.2139/ssrn.481622

Nicholas A. Walraven (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Peter J. Barry

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

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