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Camera-ready art of "Regional Outlook" (263Kb PDF file - PDF help or hard copy)
In Focus This Quarter
Economic Conditions and Emerging Risks in Banking--This article provides an overview of economic conditions and banking industry trends, with a primary focus on potential risks to insured depository institutions.
Indicators of Industry Performance--The reported financial condition of insured banks and thrifts is strong. However, despite projected growth in earnings, bank and thrift stocks underperformed the broader market through October 1999.
Economic Conditions--The economy remains generally strong, and the outlook calls for continued growth. Growth is likely to slow, however, in order to correct financial imbalances that have developed as a result of a rapid creation of household and commercial credit and borrowing from abroad. There is a threat that the adjustment process could be a volatile one.
Emerging Risks in Banking--Rising indebtedness on the part of businesses and households raises concerns about future loan performance. Industry responses to intense competition have created greater credit, market, and operational risks.
Consumer Lending--Banks and thrifts are becoming increasingly involved in subprime consumer lending, which has raised some supervisory concerns.
Commercial and Industrial Lending--Signs of deterioration in corporate credit quality can be found in rising loss rates, slower profit growth, and rising corporate bond defaults. At the same time, banks are expanding their lending to heavily indebted companies in the syndicated loan market.
Commercial Real Estate and Construction Lending--Loans for real estate construction and development are growing rapidly. Despite an uptick in commercial vacancy rates, loan losses remain low.
Agricultural Lending--Low commodity prices are hurting farm operating incomes, but widespread effects on farm banks have yet to materialize.
Funding and Interest Rate Risk--Lagging deposit growth has led to a greater reliance on more volatile, market-based funding, and some institutions are taking on greater interest rate risk to maintain loan growth.
By the Analysis Branch Staff
Regional Perspectives
Economic and Banking Conditions--The Region's employment and income levels continue to rise, and joblessness remains low. Wage and salary levels have been increasing faster than the rate of inflation, implying real gains for the Region's workforce. Banks and thrifts report healthy financial performance. Commercial banks in the Region have experienced modest growth in their commercial and industrial (C&I) lending portfolios in the past few years, although C&I loans account for substantially less of the banks' portfolios than in the late 1980s and early 1990s. Reported C&I loan asset quality indicators remain favorable, while aggregate past-due and charged-off C&I loan levels have risen since midyear 1997.
New Bank Activity Occurs in Clusters--Sixty new banks opened in the Region between June 30, 1996, and June 30, 1999. In fact, 1999 is shaping up to be a record year as 19 new banks opened in the first half of the year, compared with 21 for all of 1998. Pennsylvania and New Jersey have experienced the highest levels of new bank activity in the Region. Clusters of new bank formation seem to be associated with improving economic and demographic conditions as well as industry consolidation.
Higher Interest Rates May Curtail the Region's Economic Expansion--In 1994, higher interest rates slowed down the economy and reduced capital gains realizations in the subsequent year. It is uncertain, however, that if interest rates continue to rise, the Region's economy would react as it did in 1995.
By the New York Region Staff
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