Economic analysis of correspondent banking as a source of funds to Texas agriclture

Abstract

The purposes of this study were to investigate the extent to which loan participation by correspondent banks can alleviate the legal lending limit problem in Texas and to analyse the factors influencing the supply of and demand for overline loan participations. The data used in this study were obtained from a survey of rural banks in Texas and personal interviews with major city correspondents. In addition, three interviews were conducted with selected rural banks in order to build a model bank to simulate the benefits and costs of involvement in loan participations. The survey indicated that forty three percent of all the respondent banks had acquired overline participations in 1973 and 1974. The average amounts of overline loans for rural banks that had acquired credit services were $829,000 and $877,000 in 1973 and 1974 respectively. The profitability of overline loan participations to rural banks was determined to be a function of the feedback coefficient, the additional compensating balances required, and the conditions in the money markets. During the 'tight money' period of 1974, overline participations were not profitable to rural banks. Under a more 'normal period', overline participations were only marginally profitable to rural banks.