Road Warrior

Shock and Stress Testing: Analysis by Lenders

RSS

 

My last column was devoted to discussion of financial shock tests lenders conduct on agricultural customers’ financial statements. Cash flow, liquidity and asset value changes were highlighted along with breakeven analysis. These are all components of financial shock testing in a highly volatile economic environment.  Now let’s put on the lender’s hat and examine some of the financial shock tests and analysis they must perform to ensure that the overall loan portfolio is sound.

One of the major financial shock tests that a lender must perform concerns concentration of credit. Regulators and oversight specialists are very concerned about this component as agriculture consolidates with fewer producers generating more of the revenue and carrying a larger proportion of the debt.

Lenders often have constraints on the percent of the total portfolio that can be loaned to a certain industry, for example, a maximum of 30% to the hog or the dairy industry. Speaking of concentration, lenders will analyze their largest customers to determine what percent of the total portfolio is made up of these large borrowers.

Lenders also shock test for interconnected risk or third-party counterparty risk, that is, business arrangements between customers. If one business fails, it could be detrimental to other customers in the portfolio. This is often the case when producers have contractual arrangements or deal with vertical integrators, feedlots or hay growers that have a contract with livestock producers.

Sitting on the other side of the desk, lenders are frequently asked by regulators to determine what impact a 1% or 2% interest rate increase or a decline in land values up to 50% would have on their customer base. On the grain side of the business portfolio, many lenders are shock testing for $3-4/bu. corn and soybeans in the high single digits.

Regulators are asking more lenders for higher-quality financial information; that is, up-to-date balance sheets and accrual adjusted or accountant prepared income statements. Loan covenants are being examined and scrutinized. For example, limits on capital purchases without the permission of the lender or working capital and debt level restrictions.

Lenders are under much more pressure to sensitivity test not only individual loans and borrowers but also the total portfolio. This is the new world lending after the financial crisis and it will be in the forefront if economic adversity is observed in agriculture.

Discuss this Blog Entry 10

on Mar 24, 2014

Really great post, Thank you for sharing This knowledge.Excellently written article, if only all bloggers offered the same level of content as you, the internet would be a much better place. Please keep it up!
http://www.ismemoryfoamtoxic.websiteworks.com/

on Sep 23, 2014

This is very educational content and written well for a change. It's nice to see that some people still understand how to write a quality post! studio videochat bucuresti

on Sep 23, 2014

I really impressed by reading this article. In future, you should be giving information about it more. I must have to admire you for this extra ordinary section of work. usi de exterior craiova

on Sep 23, 2014

Usually I do not read article on blogs, but I wish to say that this write-up very forced me to try and do so! Your writing style has been amazed me. Thanks, quite nice article litere volumetrice bucuresti

on Sep 23, 2014

I really loved reading your blog. It was very well authored and easy to undertand. Unlike additional blogs I have read which are really not tht good. firme luminoase bucuresti

on Sep 23, 2014

First You got a great blog .I will be interested in more similar topics. I see you got really very useful topics, I will be always checking your blog thanks. firma web design craiova

on Sep 9, 2014

Obat Tradisional Sakit Asma amazon
Apakah anda tahu yang dimaksud dengan penyakit asma? Asma adalah penyempitan saluran pernafasan yang dikarnakan hipersnsitif terhadap rangsangan, penyempitan ini biasanya bersifat hanya sementara. Penyakit asma ini dikenal dalam masyarakat awam dengan istilah penyakit bengek. penyakit bengek ini ialah seperti suara ciri pasien penyakit asma ketika kambuh. Untuk pasien asma, penyempitan saluran nafas ini merupakan respon terhadap suatu rangsang di organ paru paru normal, dan tidak akan memengaruhi pernapasan. Kejadian penyempitan seperti ini dapat ditimbulkan oleh berbagai rangsangan, misalkan serbuk sari, bulu binatang, udara dingin. obat asma herbal alami
amazon Untuk Obat Kista
Apa anda tahu Definisi kista? Sakit kista adalah sejenis tumor jinak, namun tidak bahaya. Penyakit ini sering dijumpai dikalangan wanita. Kista mempunyai bentuk yang beraneka, misalkan kistik, berisi cairan yang kental, serta ada pula yang seperti buah anggur.
Kista tidak dapat menjangkiti ke bagian organ tubuh lain, itulah sebabnya tumor jinak relatif lebih gampang diobati dengan jalan pembedahan, serta tidak berbahaya bagi kesehatan pasien.
Berdasarkan tingkat ganasnya, kista dibedakan jadi dua bagian, yaitu penyakit kista non-neoplastik dan neoplastik. Tumor Jinak non-neoplastik sifatnya tidak berbahaya serta biasanya akan mengecil dengan sendirinya setelah dua hingga 3 bulan. Namun penyakit kista neoplastik pada umumnya mesti dioperasi, tapi hal itu pun tergantung pada ukuran dan sifatnya. obat kista herbal alami

on May 2, 2014

Great post! I am actually getting ready to across this information, is very helpful my friend. Also great blog here with all of the valuable information you have. Keep up the good work you are doing here.
website design baltimore

on Jul 22, 2014

Effects by Evan Sharboneau (2nd edition) gives you instant, online access to a simple, step-by-step system in which Evan teaches you his powerful secrets, techniques, and unique photography methods for quickly and easily creating out-of-this-world images. Evan's easy-to-follow photography tutorials and "secrets of the pros" will help you bypass the "amateur photographer" stage and make you a better photographer from your very next shot
Peluang Usaha Yang Mudah Dan Menghasilkan
Peluang Usaha Yang Mudah
Peluang Usaha Yang Menghasilkan

on Sep 12, 2014

Any time people consider care associated with The item issue The item "Shock and Stress Testing: Analysis by Lenders" e-mailed in order to me, It will take your own monkey off OUR back AND ALSO reduces THE stress. Thanks pertaining to doing that.
harga iwf

Post new comment
or to use your Corn and Soybean Digest ID
What's Road Warrior?

Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

Blog Archive

Sponsored Introduction Continue on to (or wait seconds) ×