Outside loans bring credit crunch to rural banks

As the credit crunch worsens nationwide rural banks are being hurt. Although less likely to be big mortgage lenders, regional banks have invested outside their communities in order to boost their volume of loans. As Jack Armstrong of The Times-Union in Jacksonville writes,"Known as participation loans, these investments allow smaller, often rural banks to supplement low demand for loans in their areas by taking on loans from banks in more rapidly growing regions."

Many rural banks are feeling the effects of bad loans. "The trickle-down from bad participation loans is causing rural bank officials to take second looks, especially those loans tied to real estate and residential construction," Armstrong reports. Still, the downturn is not thought to be detrimental to rural banks' long term stability."Although it's a problem, it's not likely to lead to many small bank failures," Armstrong reports. "Participation loans rarely make up a large percentage of a rural bank's loan portfolio."

It is difficult to estimate how many bad participation loans a particular bank holds, because financial reports do not separate them out. Even if the economy continues to worsen participation loans should not have any major repercussions on the longterm stability of rural banks. But it's a question enterprising rural journalists should ask their local banks. (Read more)