A University of Illinois economist says U.S. commercial banks overall are better equipped than agricultural banks to withstand losses and less vulnerable to insolvency, due to a stronger level of capital.
Banks that experience higher levels of risk are expected to maintain capital levels above regulatory minimums. The Federal Deposit Insurance Corp. measures risk with a ratio measuring a bank’s capital relative to its risk-weighted or total assets, Gerald Mashange, an agricultural economist at Illinois, writes in an analysis of banks' capital adequacy.
While banks across the size spectrum meet the federal minimum of 6% under the Tier-1 risk ratio, those with higher ratios are better prepared for asset devaluations and losses that could lead to bank failure.
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"Agricultural banks consistently demonstrated lower capital ratios across all comparable asset size categories," said Mashange, comparing these findings to non-agricultural banks across all asset size categories.
Banks are classified as agricultural if farm real estate and operating loans exceed 25% of their net loans and leases. There are 1,022 agricultural banks and 2,518 non-agricultural banks today.
Agricultural banks with assets of $100 million to $250 million had slightly above minimum total risk-based capital ratios of 8.69%. But non-agricultural banks in the same range had higher ratios at 9.75%, with ratios up to 14.23% for non-agricultural banks with $10 billion in assets.
Adequate capital measured by risk ratio is a critical indicator of a bank’s financial health and stability. In 2023 alone, the United States experienced four major bank failures, including Republic Bank, Silicon Valley Bank, and Signature Bank.
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