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Abstract

Summary : The uncertainty of the COVID-19 crisis is exposing community banks to a severe adverse shock that is arguably greater than the 2008 financial crisis. A stress test for the 1,671 agricultural banks and 2,261 non-agricultural banks in the United States is completed to provide an estimate of the potential effect of the COVID-19 crisis on bank financial status for 2000-2024. The stress test applies chargeoff rates derived from banks’ actual chargeoff rates for 2008 through 2012, which includes the recession and recovery following the financial crisis. The chargeoff rates applied to each bank in a local market are taken from the 90th percentile chargeoff rates for all banks in the market. Non-agricultural banks are projected by the simulation to be more adversely impacted than agricultural banks. A greater share of non-agricultural banks are expected to fail and to have lower profitability than the share of agricultural banks. A key assumption of the simulation is that agricultural loan chargeoff rates are less than non-agricultural loan chargeoff rates was the case during the 2008-2012 financial crisis. For this assumption to hold, it is implicitly assumed financial support will be provided to farmers and ranchers and the support when allocated and distributed will offset the negative impact from the COVID-19 shock experienced by farmers and ranchers. Without the support, more agricultural banks would be expected to have financial difficulties and fail. Moreover, if support is not allocated to match the parts of the agricultural sector most negatively impacted by the COVID-19 crisis, regional differences in the impact on agricultural banks are likely to emerge.

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