Source: TEXAS A&M UNIVERSITY submitted to NRP
LOAN PORTFOLIO RISK MANAGEMENT
Sponsoring Institution
National Institute of Food and Agriculture
Project Status
COMPLETE
Funding Source
HATCH
Reporting Frequency
Annual
Accession No.
0192677
Grant No.
(N/A)
Cumulative Award Amt.
(N/A)
Proposal No.
(N/A)
Multistate No.
(N/A)
Project Start Date
Jun 5, 2002
Project End Date
Jun 4, 2007
Grant Year
(N/A)
Program Code
[(N/A)]- (N/A)
Recipient Organization
TEXAS A&M UNIVERSITY
750 AGRONOMY RD STE 2701
COLLEGE STATION,TX 77843-0001
Performing Department
AGRICULTURAL ECONOMICS
Non Technical Summary
Many ag lenders are making loan decisions based on point estimates without full knowledge of various risk outcomes. Capital projections require forecasts for credit quality, past due loans, and loan losses. Current methods do not adequately provide the necessary forecasts. The purpose of the research is to help the lender meet its objectives of better risk identification within the loan porfolio, improved forecasting of key input variables for internal capital and budget planning, and providing a methodology for determining levels of the regulatory required loan loss reserve account balances.
Animal Health Component
60%
Research Effort Categories
Basic
20%
Applied
60%
Developmental
20%
Classification

Knowledge Area (KA)Subject of Investigation (SOI)Field of Science (FOS)Percent
60271103100100%
Knowledge Area
602 - Business Management, Finance, and Taxation;

Subject Of Investigation
7110 - Research on research management;

Field Of Science
3100 - Management;
Goals / Objectives
The objectives of this research include: 1. develop methods to measure agricultural loan portfolio risk; 2. develop modeling methods to incorporate risk from key variables; 3. develop methods to determining the magnitude and probabilities of loan default, loan loss, and annual credit quality migration for a loan portfolio.
Project Methods
The approach to reaching the objectives of this research include: 1. developing a logit credit scoring model that predicts credit classification; 2. developing a simulation model that projects and accounts for individual loan repayment capacity, balance sheet changes, loan collateral margin, loan loss, and calulates a credit score; and 3. linking the results of the two models to provide the loan default, loan loss, and credit quality migration results. Data used in the models will include historical lender loan information, both summary and specific loan information, regional extension crop and livestock budgets, and state and federal statistics.

Progress 06/05/02 to 06/04/07

Outputs
The work on the project was completed. A Stress Testing Model was developed for the Farm Credit Bank of Texas. The model allowed for the Farm Credit Bank of Texas to stress test their over $2 billion real estate portfolio. The model has been used in 2003 and 2004 with results utilized by lenders if 4 states, including Texas, Alabama, Louisiana, and Mississippi. Work was complete by January 2003.

Impacts
Several areas of impact are expected. First, the lenders have been exposed to current modeling and risk identification methods. It is expected that the lenders will begin to incorporate these methods into their normal risk determination processes. Second, the results of the model have provided the lenders with specific 2-year, credit migration forecasts that were previously not modeled but were a major component of the lenders capital and financial planning. Finally, specific sources of stress, risk, and risk levels that were previously not modeled have been identified in a quantitative manner.

Publications

  • No publications reported this period


Progress 01/01/02 to 12/31/02

Outputs
A stress testing, real estate loan portfolio model has been developed for the Farm Credit Bank of Texas for use by the real estate lending associations. Through the model the users will learn about the specific variables that are effecting potential weaknesses in the real estate loan portfolio. The model was implemented in the fall of 2002 for use in the lender's 2003 and 2004 fiscal years capital and financial plans. Two one and a half-day training sessions for the users were conducted in December 2002. Thirty two lenders attended these training sessions.

Impacts
Several areas of impact are expected. First, the lenders have been exposed to current modeling and risk identification methods. It is expected that the lenders will begin to incorporate these methods into their normal risk determination processes. Second, the results of the model have provided the lenders with specific 2-year, credit migration forecasts that were previously not modeled but were a major component of the lender's capital and financial planning. Finally, specific sources of stress, risk, and risk levels that were previously not modeled have been identified in a quantitative manner.

Publications

  • No publications reported this period