Safeguard your bank’s liquidity by participating your ag loans

The efforts to control inflation are being felt across multiple areas of the economy. The financial sector is no exception. As elevated interest rates increase pressure on your bank’s liquidity management, some agriculture lending solutions can provide a release valve. Participate these real estate loans with a secondary lending partner like Agri-Access. Through this approach, you can enhance the stability of your bank’s liquid assets, while minimizing risk and avoiding the unpredictability associated with other capital-raising solutions.

Elevated interest rates create liquidity pressure for banks

As the U.S. economy emerged from the COVID pandemic, escalating inflation prompted the Federal Reserve to incrementally boost interest rates from nearly zero to 5.25% within a relatively brief window of time.

“That’s like a manufacturer having their cost of goods going up 500%,” says Tracy Nelson, vice president of agricultural lending relations at Agri-Access. “That has a significant impact on how the bank operates.”

As a former bank examiner, Nelson is well-versed in the pressures bankers must navigate amid climbing interest rates:

• Higher expenses from paying high interest rates to attract and retain depositors to grow capital
• Higher borrowing costs forcing borrowers to postpone major purchases
• Impact on loan performance, as some borrowers may struggle to make the higher payments

Meanwhile, a bank’s key source of funding, long-term bonds and securities, may be locked in at below-market rates — because these were purchased well before the rate climate shifted.

The dilemma banks face is if they are forced to sell these securities ahead of the maturity date to raise capital. The realized losses would not only limit their lending capacity, but could also invite scrutiny and intervention from bank regulators. A notable drop in capital of, say, 20%, 30% or even 40%, would raise red flags to regulators about the bank’s ability to operate and meet their obligations.

In fact, this exact scenario is what fueled a smattering of bank failures in early 2023.

“Their depositors came calling and unfortunately, it was the proverbial bank run that doomed Silicon Valley Bank,” Nelson says. “They just didn’t have enough assets to liquidate in a timely manner. And anything they would have liquidated within the securities portfolio would have been sold at a significant loss.”

Pursuing solutions for managing liquidity risk

To address these challenges, many banks are pursuing alternative funding sources, including so-called “volatile liabilities,” which include FHLB advances, and other borrowings of less than one year, Federal Funds Purchased and Time Deposits of greater than $250,000. But there are downsides to this strategy. As its name implies, volatile funding sources are subject to rapid changes due to market conditions and economic factors — so they can’t always provide a ready source of capital. Banks should be mindful of maintaining the ideal ratios of volatile liability dependence due to associated risk factors.

Participation lending provides safety valve for banks

Participation lending might seem like an unconventional solution to ease the liquidity challenges banks are currently encountering. Typically, ag lenders might tap into lending partnerships to enhance their loan offerings for farmers. However, in this interest rate climate, participation lending emerges as a powerfully effective tool to help banks mitigate liquidity risk.

Used in place of volatile liability options, participation lending from Agri-Access provides a safety valve for banks — minus the volatility.

How it works: Agri-Access buys 100% of the agricultural real estate loan from the bank.

Immediate benefits: Banks realize benefits immediately by preserving capital for future loan growth, without having to give up the borrower relationship.

Flexibility and control for lending partners: What makes this partnership with Agri-Access unique is we don’t keep ag lenders locked into an agreement for the life of the loan. This comes as good news for banks that would prefer the option to buy back all or a portion of the loan at any time. We also offer flexibility to your borrowers through our interest rate conversion feature, which offers a convenient, low-cost option for refinancing.

Dependability: Unlike volatile liability solutions, Agri-Access is a stable source of capital. As long as there are qualified farmers looking to purchase another parcel of land, banks can adopt participation lending as an integral part of their liquidity management strategy. What’s more, partnering with Agri-Access reduces lender risk, which means adopting this solution won’t raise red flags with regulators.

Learn about our participation loan offerings, and how they can be part of your bank’s liquidity risk management strategy and reach out to a relationship manager any time to get started.