A triple hurdle model of US commercial bank use of guaranteed operating loans and interest assistance

Abstract

Purpose -The purpose of this paper is to estimate a three-equation model of US commercial bank usage of the Farm Service Agency's (FSA) guaranteed operating loan and interest assistance programs. Also, to identify the key farm and banking variables that affect the decision to use loan guarantees and the volume of loans with interest assistance. Design/methodology/approach -A triple hurdle, three-equation system is estimated to model three decisions: to participate in the FSA operating loan program; whether to use interest assistance given the decision to participate in the operating loan program; and then the degree of participation in the interest assistance program. Statistical selection is modeled. Data on almost all commercial banks in the USA from 1995 to 2003 are used in the estimation sample. Findings -Statistical selection is statistically significant so selection must be included in the models. Variables reflecting state-level characteristics such as farm debt servicing ratio, individual bank loan-to-asset ratio, bank size and the general guaranteed loan and interest assistance environment are significant in all three equations. Intensity of interest assistance use varies markedly across states. Originality/value -The interest assistance program has high subsidy costs and is an important source of support for financially marginal farmers. Scant prior research has investigated this program. The present study also shows that modeling interest assistance usage must be embedded in a larger model to give a complete specification.

Bank size, lending paradigms, and usage of Farm Service Agency's guaranteed loan programs

“…Ahrendsen et al (2004) found the use of guaranteed interest assistance was associated with greater financial stress. Utilizing a bank portfolio model, Ahrendsen et al (2011) found that state-level indicators of increased farm financial risk and bank lending risk lead to increased usage of FSA-guaranteed loan programs.…”

FSA farm loan repayment under economic recession and drought conditions

“…During periods of significant financial stress that affect the entire economy, the vulnerability of farm businesses in coping with increased business risks can become a concern (Dixon et al, 2011;Escalante et al, 2004;Phillips and Katchova, 2004). Some studies clarify the relative strength of certain farm enterprises and regional farm industries in withstanding economic and natural shocks that threaten business efficiency and viability (Ahrendsen et al, 2011;Dixon et al, 1999;Koenig and Sullivan, 1993). Although repayment records of farm borrowers have been notably better than non-farm clients of commercial banks during the recession of the late 2000s (Li et al, 2013), special attention during such difficult times would still be naturally drawn toward validating the endurance of FSA borrowers, given their relatively "marginal" status compared to other farmers.…”

Modeling duration of FSA operating and farm ownership loan guarantees

“…The borrower region was defined as the ten USDA Farm Production regions (US Department of Agriculture, Economic Research Service, 2010). Distinct regional differences in FSA loan programs, as shown in previous studies, would suggest regional differences in loan duration (Dodson and Koenig, 2003;Ahrendsen et al, 2011).…”

“…Previous studies on guaranteed loans have focused on examining factors influencing banks' decisions on participating in guaranteed loans programs (Settlage et al, 2006;Ahrendsen et al, 2011;Dodson, 2014), while others have focused on identifying factors affecting volume of loan guarantees, loss claims, and principal outstanding for both OL and FO loans (Dixon et al, 1999;Settlage et al, 2001a, b). The latter are more relevant to this analysis and merit further discussion.…”