An Evaluation of the Effects of Changes in Regulation Q on Farm Lending by Agricultural Banks
Barnard, Freddie Lynn
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https://hdl.handle.net/2142/69848
Description
Title
An Evaluation of the Effects of Changes in Regulation Q on Farm Lending by Agricultural Banks
Author(s)
Barnard, Freddie Lynn
Issue Date
1982
Department of Study
Agricultural Economics
Discipline
Agricultural Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Agricultural
Abstract
This study was designed to investigate the effects of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMC) on agricultural lending by commercial banks. The problem was investigated by first estimating a demand equation for nonreal estate agricultural loans. The estimated demand equation was used in a quadratic programming model of an agricultural bank to represent loan market imperfection, and evaluate the portfolio effects of financial deregulation.
The linear demand equation for nonreal estate agricultural loans was conceptualized and estimated with the interest rate charged by commercial banks as the dependent variable for consistency with the data requirements of the quadratic programming model. The equation was estimated using cross-section and time-series data from 67 small, agricultural banks located in East Central Illinois for the period, fourth quarter 1972-fourth quarter 1979.
A quadratic programming model of a small, agricultural bank with the objective function specified to maximize expected utility was then used to evaluate the effects of the 1980 Act. The variance-covariance matrix is unique since it includes not only variances and covariances for asset rates of return and costs of liabilities, but also the slope coefficient for the estimated load demand equation. Thus, the model takes into account both risk and market imperfection. Activities in the model include fund acquisition, lending, and nonloan investments.
Results from the study indicate that rural banks will price their loans more responsively and precisely after the provisions of the DIDMC Act are completely phased in than before. Also, controlling portfolio variance will be a major concern for rural banks after deposit interest rates are deregulated. Therefore, variable-rate loan pricing will be a common practice.
The reduction in reserve requirements will increase fund availability since smaller proportions of every dollar acquired will be required to satisfy reserve requirements. However, the costs of funds will increase due to deposit rate deregulation, which could actually reduce expected income relative to pre-DIDMC conditions.
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