Preliminary Analysis of the Financial Condition of the Farm Credit System

GGD-86-13BR: Published: Oct 4, 1985. Publicly Released: Oct 4, 1985.

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In response to congressional requests, GAO provided an assessment of the financial condition of the farm credit system as of June 30, 1985, and a projection of what the system's financial condition might be under two sets of assumptions by June 30, 1986.

GAO found that the profitability of the system has declined since 1982, and problem loans continue to mount; however, allowances for loan losses were adequate to absorb all bad loans that were charged off during the 12-month period ending June 30, 1985, and adjusted capital continued its 4-year upward trend. GAO found that: (1) during the first half of 1985, the quality of the Federal Land Banks' loan portfolio deteriorated, and continued deterioration in these loans may require banks to significantly increase their allowance for loan losses; (2) based on historical trends, future earnings will not be sufficient to cover the necessary provision for loan losses, and increases in the allowance for loan losses will require a reduction in the earned surplus accounts; (3) increased earnings trends are unlikely because the cost of borrowed funds may increase and the interest rates charged system borrowers may have reached a point where the lending rates are no longer competitive; and (4) if current trends continue through June 1986, the system will have to use its earned surplus to increase its allowance for loan losses. GAO believes that the ability of the system to weather these difficulties without external assistance will depend on the ability of its adjusted capital to absorb losses and how much longer the decline in earnings will last.

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