Central Banker - Spring 2013

7/30/2019 Central Banker - Spring 2013

1/12

T h e F e d e r a l r e s e r v e B a n k o F s T . l o u i s : C e n T r a l T o a m e r i C a s e C o n o m y | s T l o u i s F e d . o r g

Ce nT ral

n e w s a n d v i e w s F o r e i g h T h d i s T r i C T B a n k e r s

SPRING

2013

By Gary Corner and Andy Meyer

The total volume o loans heldby community banks peaked in2008 and dropped during the nan-cial crisis and Great Recession. Totalloans bottomed out in 2011 and, as oDecember 2012, have only recovered to

a level roughly 10 percent below their2008 peak.

During this period, both demandand supply actors undoubtedly playedroles in the change in bank lend-

ing. In the years beore the crisis, theperception o ever-rising residentialand commercial real estate pricescaused loan demand to soar. Onthe supply side, some (though cer-tainly not all) banks relaxed assortedunderwriting standards, accepting

applicants with litt le equity or withoverly optimistic property apprais-als and income orecasts. During thenancial cr isis, Great Recession andsluggish economic recovery, businessand household loan demand weakenedconsiderably as rms and householdscut spending, increased savings and

increased balance sheet liquidity. Onthe supply side, banks that had relaxedsome standards naturally raised themto more sustainable levels in an eortto reduce their risk and to limit urtherlosses. Thus, both demand and supplyactors contributed to the drop-o inlending, and the relative contributiono each actor is dicult to distinguish.

Community Bank Lending

during the Financial Crisis

Cmmty Bk Lg T

Quality loans and local deposit-tak-ing are the oundation o communitybank prots and growth. Despite thenancial crisis, healthy communitybanks still had an incentive to maxi-mize prots by lending, as long as risk

actors were balanced. As illustratedin Figure 1 above, small commu-nity banks across the Eighth Federal

continued on Page 6

FeaTured in This issueThe Global Battle Over Central Bank Independence | Can FASB Get Loan Loss Accounting Just Right?

figure 1

Total Loans

60

70

80

90

100

110

120

130

Index(2

007=1

00)

2007

2008

2009

2010

2011

2012

Eighth District banks with assets less than $1 billion

Eighth District banks with assets $1 billion-$10 billion

U.S. banks with assets less than $1 billion

U.S. banks with assets $1 billion-$10 billion

KeY


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slct st. L F st

d-Fk rglty rm rlwww.stlouised.org/rrr

Fred (Federal Reserve Economic Data)www.research.stlouised.org/red

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www.stlouised.org/HFS

News and Views for Eighth District Bankers

Vol. 23 | No. 1

www.stlouisfed.org/cb

ediTor

Scott Kelly

314-444-8593

[email protected]

Ce Beis published quarterly by the

Public Aairs department o the Federal

Reserve Bank o St. Louis. Views expressed

are not necessarily ocial opinions o the

Federal Reserve System or the Federal

Reserve Bank o St. Louis.

Subscribe or ree at www.tl.gcb to

receive the online or printed Ce Be. To

subscribe by mail, send your name, address, city,

state and ZIP code to: Ce Be, P.O. Box

44, St. Louis, MO 666-44. To receive other

St. Louis Fed online or print publications, visit

www.tl.gbcb

Follow the Fed on Facebook, Twitter and more

at www.tl.gllwt

The Eighth Federal Reserve District includes

all o Arkansas, eastern Missouri, southern

Illinois and Indiana, western Kentucky and

Tennessee, and northern Mississippi. The

Eighth District oces are in Little Rock,

Louisville, Memphis and St. Louis.

C e n t r a l v i e w

The Global Battle OverCentral Bank IndependenceBy James Bullard

Financial crisis atershocks havepartially broken down the con-sensus on the wisdom o central bank

independence. They have introduceda creeping politicization o centralbanking globally. To the extent thatcentral bank independence is weak-ened globally, macroeconomic stabi-lization policy will not be executed as

well in the uture as it has been sincethe mid-1980s. Fiscalization o mon-

etary policy will tend to complicate thepolicymaking process substantially.

C Ctl Bk ipc

Eective macroeconomic stabilization policy has to beimplemented in a timely manner in reaction to macroeco-nomic shocks. Adjusting scal policytaxation, appropria-tions and public debtas a means or stabilization tends tobe slow and must be careully negotiated, while monetarypolicy can be implemented in a timely and technocraticmanner. Hence the conventional wisdom: Focus scal

policy decisions on the medium and longer run and delegatemonetary policy to an independent authority.I monetary policy is not delegated to an independent

authority, then it too becomes part o the slow and compli-cated negotiations associated with scal policy. The society

would be let without a way to make timely policy adjust-ments in reaction to macroeconomic shocks, and the result

would be more macroeconomic volatility. The consensus

thereore suggests that macroeconomic outcomes will bebetter with an independent central bank.

Fcl rp

In recent years, the central banks in the G-7 countriesencountered the zero lower bound on nominal interestrates. In my view, central banks have conducted stabiliza-tion policy eectively even while at the zero bound, primar-ily through the use o quantitative easing programs andorward guidance. Nevertheless, many see scal stabiliza-tion policy as desirable in the current context.

One idea suggested by some is that the central banktake actions that are cumbersome to accomplish through ademocratically elected body, which may be seen as one wayto get the relatively speedy monetary policy decision-mak-

ing into a scal policy context. However, this is a creepingpoliticization o monetary policy. In such a case, some cen-tral bank independence is lost since the monetary authorityis taking actions at the behest o other policy actors. Fur-thermore, monetary policy decisions then become wrapped

James Bullard is

president and CEO of

the Federal ReserveBank of St. Louis.

continued on Page 10

2 | Central Banker .ss.g


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Q u a r t e r l y r e p o r t

Fourth-Quarter Banking Perormance

Earnings Performance 2011: 4Q 2012: 3Q 2012: 4Q

return on AverAge Assets2

All U.S. Banks 0.67% 1.00% 0.97%All Eighth District States 0.57 0.89 0.87

Arkansas Banks 1.08 1.13 1.18

Illinois Banks 0.34 0.67 0.64

Indiana Banks 0.90 1.12 1.12

Kentucky Banks 0.65 1.10 1.03

Mississippi Banks 0.73 0.91 0.89

Missouri Banks 0.66 0.91 0.89

Tennessee Banks 0.04 0.84 0.80

net interest MArgin

All U.S. Banks 3.96% 3.86% 3.87%

All Eighth District States 3.91 3.84 3.84








LoAn Loss Provision rAtio

All U.S. Banks 0.61% 0.35% 0.35%



Illinois Banks 1.00 0.58 0.55Indiana Banks 0.45 0.22 0.23





Asset Quality Measures 2011: 4Q 2012: 3Q 2012: 4Q

nonPerforMing Assets rAtio3

All U.S. Banks 4.71% 4.09% 3.73%

All Eighth District States 5.17 4.48 4.09Arkansas Banks 5.67 5.04 4.76







LoAn Loss CoverAge rAtio4

All U.S. Banks 61.57% 67.07% 71.78%




Indiana Banks 64.11 69.23 75.06





SOURCE: Reports o Condition and Income or Insured

Commercial Banks

NOTES: 1 Because all District banks except one have assets

o less than $15 billion, banks larger than $15

billion have been excluded rom the analysis.2 All earnings ratios are annualized and use

year-to-date average assets or average earnings

assets in the denominator.3 Nonperorming loans plus OREO are those 90 days

past due or in nonaccrual status or other real

estate owned.

4 The loan loss coverage ratio is defned as the

loan loss reserve (ALLL) divided by nonperorm-

ing loans.

Central Banker Sg 2013 | 3


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i n - d e p t h

Can FASB Get Loan LossAccounting Just Right?

By Michelle Neely and Gary Corner

The Financial Accounting Stan-dards Board (FASB) recentlyreleased a proposal that would changethe way nancial institutions set asideunds to cover losses on loans, debtsecurities and other assets. Undercurrent accounting rules, the allow-ance or loan and lease losses (ALLL)

is based on incurred losses; the newmodel, i adopted, would require theallowance to be established or losses

expected over the lie o the loan basedon current and uture economic condi-tions, historical losses, and other ac-tors. The change was prompted by theglobal nancial crisis, when stakehold-ers were blindsided by the tremendouscredit risk that had built up in manyinstitutions loan portolios.

their portolios o subprime loans, orexample, were in trouble long beorehomeowners started deaulting, buttheir nancial statements did not (andcould not, under GAAP) communicatethat to investors.

ot wt t ol

The push to revamp accounting orcredit losses began in 2009 when FASB

and the International AccountingStandards Board (IASB) launched a

joint project to improve loss account-ing and mitigate dierences in U.S.(GAAP) and international (IFRS,or international nancial reportingstandards) accounting systems. By thesummer o 2012, the project had bro-ken down as the two accounting bodiescould not agree on some signicantmatters. FASBs concerns were that

the agencies joint proposed impair-

ment method was too complicated andonly allowed or a one-year projec-tion period. Bankers had also arguedthat the joint proposal didnt take intoaccount the diverse nature o bankinginstitutions in the U.S.

Under FASBs new Current ExpectedCredit Loss (CECL) model, unveiledin December, nonaccrual loans wouldbe treated as beore. For unimpairedloans and other credit instruments, theinstitution would estimate expectedcredit losses at every reporting period.1That estimate would capture all con-tractual cash fows that the institutiondoes not expect to collect and would bebased on past events, current condi-tions, and reasonable and supportableorecasts about the uture.2 Impor-tantly, the estimated losses would notbe limited to those expected over aspecic period o time, leaving mostobservers to conclude that estimated

losses should be based on the lie othe credit instrument.

Wll nw Ml sty stkl?

Reaction to the FASB proposal hasbeen mixed. On the positive side, an

Under FASBs new Current Expected Credit Loss

model, nonaccrual loans would be treated as

before. For unimpaired loans and other credit

instruments, the institution would estimate

expected credit losses at every reporting period.

Financial institutions ollow gener-ally accepted accounting principles(GAAP) when reporting nancialinormation. Under GAAP, undingor the ALLL is determined by what aninstitution thinks it will lose on loansbased on events that have alreadyoccurred; this method is reerred toas the incurred loss method. There

are a number o problems with thismethod, the most signicant o whichis that it is not orward-looking.

Credit losses arent recognized untilthey are probable or have alreadyoccurred, thus making it dicult orinvestors to be orewarned o imbed-ded losses, as in the most recent nan-cial crisis. Many bankers knew that



5/12

accounting expert at the AmericanBankers Association says the CECLmodel would be operationally simpleras well as making the ALLL balanceeasier to understand and to explainto investors and management.3 Themodel would allow ALLL balancesto increase during periods o eco-

nomic growth, i inormation suggestsbanks are taking on greater creditrisk or uture economic conditions areexpected to deteriorate. This practicehas historically been discouraged bythe Securities and Exchange Commis-

sion, which is concerned about earn-ings smoothing.

A recent report by the GovernmentAccountability Oce (GAO) highlight-ing the work o the U.S. TreasurysFinancial Stability Working Group on

Loss Provisioning is also supportive.4The working group asserts that earlierrecognition o potential loan lossescould have lessened the impact o thenancial crisis since banks ultimatelyhad to recognize their credit loss expo-sures pro-cyclically through a suddenseries o provisions to the loan lossreserve, thus depleting their earningsand regulatory capital.

Bankers do have some concernsabout the proposal though. The big-

gest objection is that FASB has notspecied a time period over which

losses are to be estimated, leavingmost to interpret the time period to bethe lie o a loan or debt security. Mostobservers objected to an arbitrary one-

year time horizon that the IASB hasfoated, but they argue that the FASBproposal goes to the other extreme. Alie o the loan loss projection wouldrequire inormation and orecasts thatmost bankers currently do not havethe expertise to generate. Estimatinglosses on debt securities that are notgovernment-guaranteed, l ike munici-pal bonds, would be dicult. Stillothers worry that the CECL modelmoves bank accounting more toward

a market-value ramework. It is alsounclear howi at allthe new model

would aect capital requirements andthe regulatory treatment o both theALLL and bank capital.

The FASB proposal is out or com-ment until May 31. FASB chair LeslieSeidman has said that a nal standard

will likely be in place by early 2015.

Michelle Neely is an economist and Gary

Corner is a senior examiner at the Federal

Reserve Bank of St. Louis.

ENDNOTES

More specifcally, the CECL model covers loans

held or investment; held-to-maturity and

available-or-sale debt securities; loan commit-

ments; trade, lease and reinsurance receivables;

and any other receivables with contractual rights

to receive cash.

Proposed Accounting Standards Update

Financial InstrumentsCredit Losses (Subtopic

85-5), I Focus, FASB, Dec. , .

FASB Impairment Exposure Drat: Frequently

Asked Questions (as o /4/), American

Bankers Association,

www.aba.com/Solutions/Acct/Documents/

ABAimpairmentEDFAQsJan.pd

4 Causes and Consequences o Recent Bank

Failures: GAO--7, Jan. , , www.gao.gov/

products/GAO--7

More on the FASB Proposaland Credit Loss Accounting

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6/12

Reserve District did increase the size

o their total loan portolios comparedto their 2007 levels.1

The story is dierent or the othergroups o community banks, however,

as their total loans experienced anotable decline relative to their 2007levels. In act, across the loan catego-ries we reviewedcommercial realestate, 1- to 4-amily rst-lien loans,and commercial and industrial loansthe data suggest that small EighthDistrict community banks collectivelyexperienced more stability in lend-ing volume than large Eighth Districtcommunity banks and communitybanks nationwide.

One example is in commercialreal estate lending. From 2008onward, commercial real estatelending dropped in all our groupso banks, as seen in Figure 2 to thelet. A major actor in this decrease

was the all in commercial real estateprices across the nation. Lendinghas increased somewhat in smallEighth District community banksand appears to have leveled o in the

other bank categories.In reviewing 1- to 4-family loanvolumes, more stability is shownacross community banks both nation-ally and District-wide, as seen in Fig-ure 3 to the let. For all our groups,

total loan volume was higher in 2012than in 2007. It is important to notethat these mortgages are the ones thatcommunity banks have kept in theirown portolios, as opposed to the onesthat they have sold in secondary mar-

kets. During this period, the deaultrate on loans in banks own portolios

was lower than those in the securi-tized secondary market.

Next we turn to commercial andindustrial lending. Across all groups,commercial and industrial lending

volume largely declined relative to2007 levels, as seen in Figure 4 to the

let. But again, the lending pattern orsmall Eighth District banks was themost consistent. In a push to diversiy

away rom the hard-hit commercialreal estate sector, many lenders areemphasizing commercial and indus-trial lending. Anecdotally, communitybank lenders report that they increas-ingly nd themselves competing with

Community Bank Lendingcontinued from Page 1

Eighth District banks with assets less than $1 billion

Eighth District banks with assets $1 billion-$10 billion

U.S. banks with assets less than $1 billion

U.S. banks with assets $1 billion-$10 billion

figure 2

Commercial Real Estate Loans

60

70

80

90

100

110

120

130

Index(2

007=1

00)

2007

2008

2009

2010

2011

2012

figure 3

1- to 4-Family First Mortgages

60

70

80

90

100

110

120

130

Index(2007=1

00)

2007

2008

2009

2010

2011

2012

figure 4

Commercial and Industrial Loans

60

70

80

90

100

110

120

130

Index(2007=1

00)

2007

2008

2009

2010

2011

2012

KeY



7/12

regional-sized institutions or thesame customers.

L Pctg Cmmty

Bk Blc st

The data suggest that growth incommunity bank total assets hasoutpaced the growth in community

bank total loans, as seen in Table 1to the right. As the returns on otherpersonal investment vehicles elldramatically, customers fooded banks

with deposits, causing a huge increasein liquidity. Loan demand could notabsorb all o the unds; so, the banksunneled many o them into invest-ment securities and cash balances.O course, this surge in deposits mayquickly dissipate as depositors eco-nomic opportunities change.

tABLe 1

Growth in Community Bank Total Assets

Yanmb

Cmmy Bak

Aa A

Cmmy Bak

tal La/

tal A

2007 District 717 $267.2 million 69.7%

2012 District 645 $332.6 million 60.3%

2007 U.S. 7,139 $319.9 million 68.9%

2012 U.S. 5,949 $384.4 million 60.7%

NOTE: Community banks are those that averaged less than $10 billion in total assets over

the six-year period.

Small community banks across

the Eighth Federal Reserve

District did increase the size

of their total loan portfolios

compared to their 2007 levels.

ENDNOTE

Small community banks are defned in this

article as institutions with less than $ billion

in assets, while large community banks have

between $ billion and $ billion in assets. In

all o the fgures, banks are assigned to a size

class based on their average assets over the ull

six-year period; so, no banks move between size

classes. To acilitate comparisons across sizeclasses and geographic regions, each time series

is indexed to at the beginning o the period

(December 7).

In terms o earnings, the opportu-nity cost o holding excess liquidity issignicant. Consequently, communitybanks protability is unlikely to reachhistorical norms with their currentbalance sheet mix. O course, com-munity bankers are cognizant o theirhigh levels o liquidity and are gener-

ally poised and eager to lend.

Ccl

Community bank lending hasapparently turned a corner and is ris-ing again ater a prolonged decreaseduring the nancial crisis. Althoughdemand and supply actors play di-cult-to-measure roles, one actor thatstands rm is that community banks

have a strong prot motive to pursuequality lending relationships and arenot presently constrained by balancesheet liquidity needs.

Gary Corner is a senior examiner and Andy

Meyer is a senior economist at the Federal

Reserve Bank of St. Louis.

Upcoming Annual Report Looksat Household Balance Sheets

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8/12

i n - d e p t h

Is the Fed MonetizingGovernment Debt?The nancial crisis and GreatRecession have magnied publicscrutiny o the Federal Reserve, a con-sequence o the extraordinary actionsthe Fed has taken since 2008.

Among the Feds actionsspeci-cally those by the FOMC (Federal OpenMarket Committee), the Feds mon-

etary policymaking bodyhas beenthe increase o the U.S. monetary base.Since August 2008 the Fed has tripled

the monetary base rom about $0.8trillion to $2.7 trillion, o which $1.2trillion was used to purchase U.S. gov-ernment bonds (i.e., Treasury debt).1

As St. Louis Fed economist DavidAndolatto and research associateLi Li explore in a recentEconomicSynopses, this has led some com-mentators to argue that the Fed ismonetizing government debt.2Essentially, the concern is that theFed is somehow enabling excessive

government borrowing and possiblyrisking uture infation.

demonetizing government debt overthe course o the typical business cycle.

However, what is usually meant bymonetizing the debt, Andolatto and Li

write, is the use o money creation as a

permanentsource o nancing or gov-ernment spending. Thereore, whetherthe Fed is truly monetizing government

debt depends on what the Fed intends todo with its portolio in the long run.

i it Pmt Tmpy ic?

In an October 2012 speech to theEconomic Club o Indiana, Fed Chair-man Ben Bernanke explained thatultimately what the Fed is doing is littledierent than what it has always done.The Feds basic strategy or strength-ening the economyreducing interestrates and easing nancial conditions

more generallyis the same as it hasalways been. The dierence is that,

with the short-term interest rate nearlyat zero, we have shited to tools aimedat reducing longer-term interest ratesmore directly.3

For example, the FOMC has madeunusually large acquisitions o longer-term securities, including Treasurydebt. But is this debt a permanentacquisition? Or will its stay on the Fedsbalance sheet be temporary? Andol-atto and Li address these questions:

Permanent I this accumulatedTreasury debt is supposed to be

permanent, then it is reasonableto expect that the correspondingsupply o new money would also bepermanent and would remain in theeconomy as either cash in circulationor bank reserves, Andolatto and Li

write. As the interest earned on thesecurities is remitted to the Trea-sury, the ederal government essen-tially can borrow and spend this new

money or ree. Thus, under thisscenario, money creation becomesa permanent source o nancing orgovernment spending.

Temporary On the other hand, ithe Feds recent increase in Trea-

Under [one] scenario, the Fed is not monetizing

government debtit is simply managing the

supply of the monetary base in accordance with

the goals set by its dual mandate.

dg Mtzg dbt

To be clear about what monetizingthe debt means, Andolatto and Lireview some basic principles. The Fedis required by mandate to keep infa-

tion low and stable and to stabilize thebusiness cycle to the best o its ability.The Fed ullls its mandate primarilyby open market sales and purchaseso (mainly government) securities. I

the Fed wants to lower interest rates, itcreates money and uses it to purchaseTreasury debt. I the Fed wants to raiseinterest rates, it destroys the moneycollected through sales o Treasurydebt. Consequently, there is a sensein which the Fed is monetizing and



9/12

possibility that orces outside the Fedhave a large impact on yields is sug-gested by the data in Figure 1 below.As the gure shows, the vast majority(85 percent) o marketable U.S. Trea-sury debt is held outside the Fed and isclose to the average ratio held over thepast 20 years.

Ccl

So, is the Fed monetizing debtusingmoney creation as a permanent sourceo nancing or government spend-ing? The answer is no, according tothe Feds stated intent. In a November2010 speech, St. Louis Fed President

James Bullard said: The (FOMC) hasoten stated its intention to return theFed balance sheet to normal, pre-crisislevels over time. Once that occurs, theTreasury will be let with just as muchdebt held by the public as beore the

Fed took any o these actions.4 Whenthat happens, it will be clear that theFed has not been using money creation

as a permanent source or nancinggovernment spending.

ENDNOTES

Most o the remaining new money has been

used to purchase mortgage-backed securities.

Is the Fed Monetizing Government Debt? byDavid Andolatto and Li Li, Federal Reserve Bank

o St. Louis Ecoomic Syopses, , No. 5.

Five Questions about the Federal Reserve and

Monetary Policy, speech by Ben Bernanke

delivered to the Economic Club o Indiana, India-

napolis, Oct. , .

4 QE in Five Easy Pieces, speech by James Bul-

lard delivered at the High Profle Speaker Series,

New York Society o Security Analysts, New

York City, Nov. 8, .

sury debt holdings is onlytemporary(an unusually large acquisition inresponse to an unusually large reces-sion), then the public must expectthat the monetary base at some point

will return to a more normal levelwith the Fed selling the securities orletting them mature without replac-

ing them. Under this scenario, theFed is not monetizing governmentdebtit is simply managing the sup-ply o the monetary base in accor-dance with the goals set by its dual

mandate. Some means other thanmoney creation will be needed tonance the Treasury debt returned tothe public through open market sales.

Bernanke has repeatedly pro-pounded the latter view, or instance inhis aorementioned speech, Andolatto

and Li explain. They also write thatthe credibility o Fed policy is argu-ably refected in the course o infa-

tion and infation expectations. Since2008, infation has averaged less thanthe Feds ocial long-run infationtarget o 2 percent per year. Moreover,market-based measures o infationexpectations remain well-anchored.So, it seems that to this point, at least,the Feds credibility is passing the

market test.Meanwhile, Andolatto and Li writethat the claim that Fed policy is exert-ing downward pressure on interestrates, especially at the short end othe yield curve, has some merit. Thequantitative impact o Fed policy onlonger rates, however, is debatable.

The reason or this is because anelevated worldwide demand or U.S.Treasury securities is keeping yieldslow independently o Fed policy. The

figure 1

Federal Reserve Holdings of U.S. Marketable Securities

6

8

10

12

14

16

20

18

PercentofTotalU.S.

Marketable

TreasurySecurities

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Sample Average = 14.07%

SOURCE: Federal

Reserve Board

NOTE: Shaded areas

indicate U.S. recessions.



10/12

Follow Regional Agricultural

Finance Conditions withQuarterly Survey

Illinoisfarmershavebeen the recipientsof23 percent of

the $13.7 billion in claimsthat havealready been paid out

on the2012 crop.4

With fourth-quarterincome at higher-than-expected

levels,h ouseholdspending, outlaysfor capitalexpenditures,

and loan repayment ratesin thefourth quarterwere alsostrongerthan expected acrossthe District. By contrast,

loan demand, whilestill positive, turned out to bea bitsoftert han initially expected. A notableexception wasin

the Memphiszone, where loan demand wasreported to be

much strongerthan expected.

With the notable exception of respondents from the

St. Louiszone, expectationsforfarmincomein thefirst

quarterof2013 areon parwith 2012 (seeTable1).

Compared with theoth erthree zones, proportionately

morebankersin the St. Louiszoneexpect farmincomein

thefirst quarterof2013 to fallbelow levelsfroma yearearlier(first quarterof2012).Forthe Districtaswhole,

bankersalso expect household spendingto remain close toyear-ago levels, but lean towarda decreasein capital

spendinginthe firstquarterof2013 relativeto a yearago.

Taxprovisionsal lowingaccelerated depreciation on quali-

Agricultural FINANCEMonitor Federal Reserve Bank of St. Louis 2

Table 1

Income and Expenditures, Land Values, and Cash Rents

S t. Lou is Li ttl e Roc k Lo ui sv il le Me mp hi s D istr ict

Income and expenditures(versusyear-ago levels)

Farm income

2012:Q4 (actual) 103 125 100 167 116

2013:Q1 (expected) 77 100 100 100 87

Household spending

2012:Q4 (actual) 119 138 100 122 120

2013:Q1 (expected) 97 100 114 89 98

Capital spending

2012:Q4 (actual) 113 138 114 122 118

2013:Q1 (expected) 84 86 100 89 87

Land values

Quality farmland $6,340 $2,557 $5,000 $3,194 $5,230

Expected 3-month trend 153 113 138 144 144

Ranchland or pastureland $2,728 $2,150 $2,050 $1,894 $2,396


Cash rents

Quality farmland $214 $91 $202 $139 $187


Ranchland or pastureland $71 $51 $82 $60 $67


In thesurvey,bankers were asked two types ofquestions:(i) estimates of current dollar values and interest rates and (ii) expectations forfuturevalues. Dollar values and rates refer to thefourth quarter of2012.Regarding expectations for futurevalues, bankers wereaskedwhether they expect values to increase,decrease,or remain constant (either relativeto a year ago or relativeto current values;see tabledescriptions).A diffusion indexvalue was then created for incomeand expendituresand for the 3-month trends in land valuesand cash

rents(per acre).The diffusion index was created by subtractingthe percent ofbankers that responded decreasefrom thep ercent thatresponded increaseand then adding100.Index values from 0to 99indicateoverall expectations ofdecreasing values;index values from101to 200indicateoverall expectations ofincreasingval ues;and an index valueof100 indicates an even split.

Agricultural FINANCEMonitoragricultural credit conditions in theEighth Federal ReserveDistrict2012 I Fourth Quarter

Thet hird quarterly survey ofagricultural credit condi-tionswasconductedbytheFederalReserveBankofSt.LouisfromDecember17 through December31; theresultspre-sentedherearebasedonthe responsesfrom61agriculturalbankswithin theboundariesofthe Eighth FederalReserveDistrict.1 TheEighth District includesallor partsofsevenMidwest and Mid-South states. Becausethes einitial dataarenotadjustedforanyseasonalirregularities(shouldtheyexist), usersarec autioned to interpret theresults carefully.In particular, usersarecautioned against drawingfirmconclusionsabout longer-run trendsin farmland valuesand agriculturalle ndingconditions. 2

In addition toour standard survey questions, weaskedfourspecialquestionson farmland saletrendsforthisedi-tion oftheAgricultural Finance Monitor. In particular, wewereinterestedinknowing(i)howthe volumeoffarmlandsales in 2012 compared with that in 2011, (ii) theshareoffarmland purchased by farmers, (iii) the motivesfor landpurchases by non-farmers, and (iv) how the majority offarmland buyersfinanced theirpurchas e.

Survey ResultsOn net, respondentsreported that fourth-quarter

District farmincome and spendingwere higherth an oneyearago (seeTable 1). Bankersindicated that farmincomein theSt. Louisand Louisvillezoneswason pacewith ayearearlier(fourth quarterof2011), whilethesouthernportion of theDistrict (i.e., theLittleRockand Memphiszones)reportedanotableincreaseinincomeandspending.Importantly, incomein theMemphis zonein thefourthquarterwashigherthan a yearearlierbecausecorn andsoybean yieldsin thesouthern portion ofthe District weresignificantly higherthan in northern areas. Farmersin thesouth werethusableto profit fromthe risein commoditypricesste mmingfrom last yearsdrought.

TheDistricts relativelystrongpe rformanceinthe fourthquartercontrasts sharply with thewide spread anticipation

in theprevious survey that last summersdrought would

significantly lowerincome and capitalspe ndingin the

St. Louisand Louisvillezones(seeTable2). In theaggre-

gate, bankersin thecu rrent survey indicated no decrease

in incomeand spendingand outcomeswere a bit better

than expected in allz ones.3 Many bankerscited theef fect

ofcrop insuranceinalleviatingt heexpected negativeimpact

ofthedrought. Regardingthisdevelopment, see theboxed

insert ofselected quotes fromsurvey participants. Accord-

ingto the U.S. Department ofAgriculture, estimated crop

insuranceclaims will reach $21 billion nationwidefor

2012more than any otheryear by far. Missouriand

Thesurvey is produced by staffat theFederal ReserveBank ofSt.Louis:Gary Corner,Senior Examiner,Bank Supervision and RegulationDivision;and Brett Fawley,Senior Research Associate,and Kevin L.Kliesen,Business Economist and Research Officer,Research Division.We thank staff at the Federal Reserve Bank of Kansas City for initial and ongoingassistancewith theagricultural credit survey.

Ifyou havecomments or questions,pleasecontact Kevin Kliesen at [email protected].

The Eighth Federal Reserve District is headquartered in St. Louis and includes branch offices in Little Rock, Louisville, and Memphis;theDistrict includes thestateof Arkansas and portions of Illinois,Indiana,Kentucky,Mississippi,Missouri,and Tennessee.

Selected Quotesfrom BankerRespondents

Acrossthe Eighth Federal Reserve District

An influx of unplanned incomearising from crop insurancepay-mentsdueto thedroughtincreased capitalspending. Cattleprices

arehigh, butherd numbersaredown in our area. (Arkansas)

The2012 droughtgreatly reduced production, butallofour banksborrowerscarried crop insurance, and many had higher levelsofcoverage. Thishasresulted in good incomefor most, and mostwil l

carry thatincomeinto2013. (Illinois)

Weseeland valuestrendinghigher. Recently farmershavebeen bor-rowingmoreto purchaserealestateas somebankshaveloosenedtheir down-paymentrequirementsdue tol ack of loan demand.

(Missouri)

Themajority offarmersarenowleavingthe banksand refinancingtheir farm debtw ith theFarm Creditagencies. They aretakingadvantageof thelong-term fixed ratesthat Farm Creditservices

provide. (Missouri)

NOTE:Thesearegenerally verbatim quotes,but somewerelightly editedto improvereadab ility.

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up with scal policy decisions, slow-ing down the process through negotia-

tion and making it considerably morecomplicated.

eCB oMT PgmAn example o this creeping politi-

cization trend is the European CentralBanks (ECBs) outright monetarytransactions (OMT) program, whichhas been widely interpreted as a

promise to buy the sovereign debt oindividual nations. Should purchasesoccur, they are conditional on thenation meeting certain scal targets.

This is scalization o monetarypolicy: asking the central bank totake actions ar outside the remito monetary policy. Assistance likethis rom a central authority to aregion is best brokered through thepolitical process in democraticallyelected bodies. The ECB is in essencesubstituting or a weak pan-Europeancentral government.

By nearly all accounts, the Euro-

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nomic shocks quickly and eectively.

This article was based on Bullards presenta-

tion on Jan. 4, 2013, at the AEA/ASSA annual

meeting in San Diego. See the presenta-

tion slides on Bullards web page at http://

research.stlouisfed.org/econ/bullard/

jbotherspeeches.html

Central Viewcontinued from Page 2



11/12

The St. Louis Feds 2013 Community Depository Institu-tions Advisory Council (CDIAC) met March 5 and 6 atthe Banks headquarters in St. Louis. The council membersmeet twice a year to advise St. Louis Fed President JamesBullard and senior Bank management on the credit, bank-ing and economic conditions acing their institutions andtheir communities.

This years council is led by the groups new chair, Glenn D.Barks, president and CEO o First Community Credit Union,based in Chestereld, Mo. Barks took over the leadership othe council rom outgoing chair Dennis M. Terry, presidentand CEO o First Clover Lea Bank, Edwardsville, Ill.

It was also the rst meeting or our new members: CarolynBetsy Flynn, president and CEO, Community Financial Ser-

vices Bank, Benton, Ky.; Larry W. Myers, president and CEO,First Savings Bank, Clarksville, Ind.; Frank M. Padak, presi-dent, CEO and treasurer, Scott Credit Union, Collinsville, Ill.;and Steve Staord, president and CEO, First National Bankin Green Forest, Green Forest, Ark. Each was appointed toa three-year term. Council members serve staggered termsand are senior executives o banks, thrit institutions andcredit unions rom across the Eighth District.

Barks, who has served on the St. Louis Feds council since

its inception in 2011, was appointed to a our-year term aschairman. In this role, he represents the Eighth District atthe Federal Reserve Board o Governors CDIAC meetings,

which are held twice yearly in Washington, D.C. The Boardestablished CDIAC in 2010 as a mechanism or communitybanks, thrit institutions and credit unions with assets o$10 billion or less to provide the Board with input on theeconomy, lending conditions and other issues. Each o theFeds 12 Reserve banks established an advisory council,

with one representative to serve on the Boards CDIAC.

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In addition to Terry, the three other outgoing members othe St. Louis Feds inaugural CDIAC council were D. KeithHener, president and CEO, Citizens Bank & Trust Co., VanBuren, Ark.; William J. Rissel, president and CEO, Fort KnoxFederal Credit Union, Radcli, Ky.; and Larry Ziglar, presi-dent, First National Bank in Staunton, Staunton, Ill.

For more inormation, see the St. Louis Feds CDIACweb site (www.stlouised.org/about_us/cdiac.cm). Formore inormation and background about all o the FederalReserve CDIACs, see the Federal Reserve Board o Gover-nors web site (www.ederalreserve.gov/abouttheed/cdiac.htm) or Community Banks, Fed Connect Through the Com-

munity Depository Institutions Advisory Council on theFederal Reserves Community Banking Connections web site(www.communitybankingconnections.org/articles/2012/Q3/Community-Banks-Connect-with-CDIAC.cm).

i n - d e p t h

St. Louis Feds CDIAC HoldsFirst Meeting o

St. LouisFed CommunityDepository InstitutionsAdvisory Council

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Central Banker Online

S EE THE ONLINE VERS ION OF THE S PRING 2 013

C E n t r a l B a n k E r AT WWW.sTLouisFed.orG/CB

FOR REGU LATORY S POTLIGHTS AND RECEN T S T . LOU IS

FED AND BOARD OF GOVERNORS RES EARCH .

FIRST-CLASS

US POSTAGE

PAiD

PERMIT NO 444

ST LOUIS, MO

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