distressed farmers and agricultural banks. Such 

 programs are very quick to get up and running. And, 

 administration of such programs is relatively 

 inexpensive and uncomplicated.-^^ 



However, according to the same analysis, the 

 advantages of a linked deposit program need to be 

 weighed against certain hidden costs and possible 

 pitfalls. State linked deposit programs do have a cost 

 that must be recognized — namely, the revenue foregone by 

 investing state money in lower yielding certificates of 

 deposit. In Ohio's $100 million program, the cost of 

 foregone revenue is $3,500 per loan, totaling $5.52 

 million for 1,575 loans at an investment rate 3.75% 

 below market rates. ^ 



State policymakers are cautioned against 

 ill-designed programs that do not sufficiently target 

 program benefits and that do not succeed in eliciting 

 the participation of financial institutions. The main 

 problem is that, under a linked deposit program, 

 participating financial institutions make the loan 

 decisions and retain the risk of bankruptcy or default 

 on these loans. In some instances, the risk of loss 

 outweighs the benefit of low-cost funds obtained under 

 the program. In other instances, the state is able to 

 generate program participation from financial lenders, 

 but little is done to increase the incentive of banks to 

 make marginal loans. Thus, farmers receiving loans 

 under the program are those who are financially strong 

 and not in need of state assistance in obtaining 

 financing for their operations. 



Based upon its analysis of these problems, the 

 Council of State Policy and Planning Agencies recommends 



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