Magazine article American Banker

Growing Threat Seen to Rural Areas from Failed Banks

Magazine article American Banker

Growing Threat Seen to Rural Areas from Failed Banks

Article excerpt

Growing Threat Seen to Rural Areas From Failed Banks

Bank failures in agricultural areas of the country have yet to substantially hurt the rural population, but this may change as bank regulators find it harder to find banks willing to acquire failed institutions, a report by the Agriculture Department said.

"Most failed banks are replaced by healthy ones within a few days,' the report said. "This may be changing, however.'

The problem involves the Federal Deposit Insurance Corp., which steps in after a bank is closed by state or federal examiners. The FDIC, as receiver, then decides how best to dispose of the bank.

From 1983 to 1985, 239 commercial banks failed. Of that number, 137 were rural. Another 107--some of which also were rural--specialized in financing agricultural activity.

The FDIC helped 185 banks reopen under new ownership.

"The FDIC is beginning to have difficulty finding banks willing to acquire failed institutions,' the report said. "Moreover, individuals suffering debt repayment problems and marginally qualified borrowers find it more difficult to obtain credit as a result of these failures, hindering local economic growth and development.'

Further, the report said, "The continuing financial problems of farmers and problems developing in the energy sector will likely cause additional rural banks to fail over the next several years.'

The FDIC has stated that more than 140 banks per year are likely to fail in the next few years. Many of these will be agricultural or rural banks.

Although the failures will hurt local and regional interests, "recent experience suggests that the national effects will be relatively mild,' the report said.

As used in the report, a commercial bank is classified as rural if its headquarters is located in a nonmetropolitan county. Agricultural banks are those with 17% or more of their loan portfolios in agricultural loans. In December 1984, there were approximately 7,900 rural banks and 5,157 agricultural banks, of which 4,523 were also rural.

The article was included in a quarterly magazine, Rural Development Perspectives, released Tuesday by the Department of Agriculture's economic research service. The report was written by an agency financial economist, Gregory Gajewski, who noted that his analysis had been reviewed by three experts at the FDIC and one at the Federal Reserve.

In addition, the report stated:

Only nine banks owned by multibank holding companies failed from 1983 to 1985, but the proportion of failures that were one-bank holding companies rose from 14% in 1983 to 54% in 1985. …

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