A Firm-Level Model for Commercial Banks Servicing Agriculture: A Multi-Stage Stochastic Programming Approach

Abstract

The model results depend upon the model specification as well as the linkage between the bank and its external environments. In general, the differences between the balance sheet decisions made by the bank under the alternative scenarios are not large. Major findings of this study are (1) profitability is not substantially affected by alternative funds; (2) alternative funds aid interest rate risk management; (3) alternative funding is advantageous when deposit funds are declining; (4) alternative funds are needed to expand loan volume in periods of high loan demand; (5) expansion of the collateral base may not be needed; (6) loan demand, policy constraints, and gap ratios are often constraining the level of alternative funds used; and (7) arbitraging may occur in banks' investment portfolio as additional funding is used.