Implications of the new capital regulations for farm credit system associations
Brandt, Cody M.
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Permalink
https://hdl.handle.net/2142/105864
Description
Title
Implications of the new capital regulations for farm credit system associations
Author(s)
Brandt, Cody M.
Issue Date
2019-06-14
Director of Research (if dissertation) or Advisor (if thesis)
Sherrick, Bruce J.
Committee Member(s)
Mallory, Mindy
Paulson, Nick
Department of Study
Agricultural and Consumer Economics
Discipline
Agricultural and Applied Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
M.S.
Degree Level
Thesis
Keyword(s)
Stress Testing, Capital
Abstract
This study compares the implications of changing from the prior capital standards to the current capital standards on Farm Credit System associations. The current capital standards effective as of January 1, 2017, were implemented to provide a higher level of safety and soundness. “Safety and soundness” refers to the ability to absorb risk and remain solvent. The difference in alternative capital standards’ safety and soundness are compared by reverse stress testing to find the degree of stress needed to breach a minimum capital standard. The reverse stress tests are done using the Association Planning Model (APM) to project pro forma financial statements and capital ratios. The APM uses seven key risk factors including loan growth rate, three measures of credit quality, two measures of interest rate spreads, and percentage change in non-interest expense. The key risk factors are all projected using a percentile of stress from each association’s unique history except for the interest rate spreads measures due to them being non stationary in their histories. The APM methodology provides a standardized stress scenario across associations allowing for the relative capital adequacy of associations to be measured. The reverse stress tests conducted using the APM indicate that the current capital standards provide a slightly higher level of safety and soundness in general, but most association hold capital far in excess of the minimums, and thus neither are binding in the near term.
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