Credit Scoring Models in Illinois by Farm Type: Hog, Dairy, Beef and Grain

Employing a logit model and farm-level data for Illinois from 1995 to 2004, this study explores the importance of farm-type differences in the development of credit scoring models. Apart from the conclusion that regional credit scoring models specific to each farm type are needed, the following are identified as the most pertinent factors for explaining creditworthiness: previous years working capital to gross farm return, the debt-to-asset ratio, and return on farm assets. Furthermore, beef farms have a larger marginal effect compared to grain farms on the probability of the farmer being highly creditworthy. Hog farms differ from grain farms in how the following financial characteristics affect farmer creditworthiness: solvency, profitability, and financial efficiency. These separate credit scoring models result in increased expected profit for the lender, better capital management, less bankruptcy, and less burden on the government and tax payers.creditworthiness, credit scoring, cut-off point, farm type, FBFM, Agricultural Finance,

Credit Scoring Models: A Comparison between Crop and Livestock Farms

This paper uses FBFM (Illinois Farm Business Farm Management Association) data to analyze several key factors in the decision to categorize borrowers into acceptable or problematic and to classify borrowers across five classes. Net worth does not play significant role in the decision process for livestock farms, whereas it is significantly important for crop farms. For livestock farms, tenure ratio is not significant across classes and is generally not significant across categories depending on the cut off point used to describe acceptable or problematic borrower. However, it is significant for crop farms. Working capital to gross farm return, return on farm assets, and asset turnover ratio are all significant for both farm types. The operating expense to gross farm return is not an independent variable for livestock farms whereas an independent and significant variable for crop farms.Financial Economics,

Three Essays in Lending

This dissertation is composed of three papers and is motivated by the 2007 subprime mortgage crisis and the 2008 financial crisis that followed afterwards. In particular, the first two papers (chapters 2 and 3) are motivated by the literature findings on the subprime crisis that lending standards had been relaxed. The first two papers examine changing characteristics of lending under relaxed lending standards. The lending characteristics in 1998 are compared to 2007. The period 1998 is the period when subprime lending was popular but before lending standards were relaxed. The period 2007 is the period after relaxed lending standards had been in effect for some time. Different than the existing literature on the subprime crisis, the first paper jointly analyzes households’ credit quality and home purchase behaviors, and the second paper analyzes the gap between households’ desired and outstanding debt levels. The focus of the first two papers is households because households were greatly affected by the crisis. They experienced high unemployment rates and major declines in their wealth, and many lost their homes. Additionally, different than most of the existing literature on the subprime crisis, the first two papers use household survey data, Survey of Consumer Finances data from the Federal Reserve Board, to examine changing lending characteristics. Overall, the findings suggest changes in the home purchase behaviors and increases in the gap between households’ desired and outstanding debt levels, for both low income and high income households. In the future, financial regulators (including the Financial Stability Oversight Council and the Consumer Financial Protection Bureau) can use these results as a sign for changing characteristics of lending under easy credit conditions and can take preventive measures before stability of the U.S. financial system is threatened and households are negatively affected by bad lending practices. The focus of the third paper (chapter 4) is the Federal Home Loan Bank (FHLB) system. The FHLB system is an important source for small banks to finance their customer loans demands. During the 2008 financial crisis, the FHLB system played a critical role in funding its member financial institutions and in improving their liquidity. Due to the significance of the FHLB system in the financial sector and the critical role it played during the crisis, this dissertation finds it worthwhile to study the loans that the FHLB system grants to small banks. In particular, the third paper examines the characteristics of banks that utilize the system advances and the determinants of advance use levels by using the Call Report data from the Federal Reserve Bank of Chicago and Summary of Deposits data from the Federal Deposit Insurance Corporation. Overall, the findings suggest that the probability of advance use and the level of advance use were higher for small banks with low core deposits, high liquidity risks, high interest rate risks, and high cost of funds, and for small banks that are located in rural counties. Knowing the characteristics of the banks utilizing advances can inform regulators about the FHLB lending practices and risk profiles of the banks that utilize FHLB advances. Under high risk profiles, the regulators can set new capital standards for the banks

Credit Scoring Models in Illinois by Farm Type: Hog, Dairy, Beef and Grain

Employing a logit model and farm-level data for Illinois from 1995 to 2004, this study explores the importance of farm-type differences in the development of credit scoring models. Apart from the conclusion that regional credit scoring models specific to each farm type are needed, the following are identified as the most pertinent factors for explaining creditworthiness: previous year's working capital to gross farm return, the debt-to-asset ratio, and return on farm assets. Furthermore, beef farms have a larger marginal effect compared to grain farms on the probability of the farmer being highly creditworthy. Hog farms differ from grain farms in how the following financial characteristics affect farmer creditworthiness: solvency, profitability, and financial efficiency. These separate credit scoring models result in increased expected profit for the lender, better capital management, less bankruptcy, and less burden on the government and tax payers

Credit Scoring Models: A Comparison between Crop and Livestock Farms

This paper uses FBFM (Illinois Farm Business Farm Management Association) data to analyze several key factors in the decision to categorize borrowers into acceptable or problematic and to classify borrowers across five classes. Net worth does not play significant role in the decision process for livestock farms, whereas it is significantly important for crop farms. For livestock farms, tenure ratio is not significant across classes and is generally not significant across categories depending on the cut off point used to describe acceptable or problematic borrower. However, it is significant for crop farms. Working capital to gross farm return, return on farm assets, and asset turnover ratio are all significant for both farm types. The operating expense to gross farm return is not an independent variable for livestock farms whereas an independent and significant variable for crop farms