Discussion 



The proposed option could stabilize bank finances 

 by allowing banks to preserve their capital. Moreover, 

 by helping the banks preserve their capital, this option 

 could enable banks to continue making agricultural 

 loans. However, it is not clear to what extent this 

 proposed option might result in increased agricultural 

 credit or financial relief for farmers. 



t 



\ 

 A major limitation of this option is that it does 



not address the problem of bad farm debt. Permitting 



banks to have a longer chargeoff period for loan losses 



only postpones recognition of these losses. The losses 



would not appear in the bank's profit and loss statement 



or balance sheet, but they would still exist. 



Finally, because the loan losses are not fully 

 recognized, banks will tend to report an inflated 

 capital level. This could result in problems with some 

 federal banking regulators. Indeed, there is an 

 indication that while the Federal Reserve System and the 

 Office of Controller of the Currency might accept this 

 practice in some instances, the Federal Deposit 

 Insurance Corporation might not.-^° 



However, it seems that a problem with federal 

 regulators will arise only if a bank has incurred 

 significant loan losses and has capital approaching the 

 level of impairment. Hence, this option should be made 

 applicable only to banks in which overall financial 

 conditions are sound and which are well-managed and 

 showing no material or significant financial weakness. 



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