Farm Lender Asset and Funding Decisions: A Micro‐Model Application

A model of loan asset allocation and funding decisions is developed and applied to a regional Farm Credit Bank (FCB) using time‐series data from 1970 to 1990. Estimated loan rate equations indicate that expected loan prepayment and default are significant sources of risk for which the FCB charged interest rate premiums. Theoretically, and practically, these rate premiums impart a positive slope to the bank's loan supply schedule. Loan supply elasticities and interest rate premiums are estimated. Long‐term loan volume is responsive to changing loan interest rates, while short‐term loan volume is not.