Explanation 



This option would give state-chartered banks a 

 longer period of time in which to charge off 

 agricultural loan losses. 



Under current state law, a bank carrying a bad 

 agricultural loan must collect on the loan, put it in 

 good bankable condition, or charge the loan out of its 

 books. If the loan is classified as a loss or 

 recognized as a loss, then such loss must be immediately 

 charged off against the bank's available capital. -"-^ 



These chargeoffs for loan losses can potentially 

 erode the capital structure of a bank. As the bank's 

 capital is reduced, both the total capacity of the bank 

 to extend credit and the size of individual loans that 

 the bank can make are correspondingly reduced. If the 

 bank's capital falls below a minimum required under 

 banking regulations, the capital of the bank may be 

 impaired and the bank could be subject to disciplinary 

 action that may lead to closure of the bank.-'-^ 



Thus, the primary objective of this option is to 

 prevent the deterioration of bank capital during the 

 current period of heavy agricultural losses in banking. 

 In addition, this option is intended to provide the 

 regulatory flexibility needed to encourage banks to 

 accent the greater risks associated with agricultural 

 loans and to work out debt restructuring plans with 

 problem borrowers. 



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