Reserve Accounting

Rural Telephone Bank's Reserve for Losses Due to Interest Rate Fluctuations Gao ID: AFMD-89-15 March 27, 1989

Pursuant to a legislative requirement, GAO studied the Rural Telephone Bank's (RTB) reserve for losses due to interest-rate fluctuations.

GAO found that: (1) RTB retained annual profits as patronage capital after distribution of cash dividends to government and private stockholders, was required to place at least 10 percent of its patronage capital in a contingency reserve, and distributed the residual balance to its loanholders; (2) RTB has converted $87.8 million in profits to loanholder patronage stock, designated $98.3 million for the reserve, and claimed $37.4 million as profits earned after dividends; (3) Public Law 100-203 eliminated fixed-rate loan commitments for advances; (4) although RTB still faced some risks due to its $625 million in outstanding unadvanced fixed-loan commitments, interest rates would have to exceed 19.2 percent for RTB to incur losses; (5) because of the low risk of large losses, a $10 million reserve appeared reasonable; (6) after RTB established the reserve level, it could distribute any residual amounts from the reserve as patronage refunds; and (7) Congress would have to change the law before RTB could redeem patronage stock for cash.

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