Enter Search TextSubmitSearch Advanced Search     Home     Deposit Insurance     Consumer Protection     Industry Analysis     Regulations & Examinations     Asset Sales     News & Events     About FDIC

		Home > Industry Analysis > Research & Analysis > New York Regional Outlook, Second Quarter 2000

New York Regional Outlook, Second Quarter 2000

Other Risks to Watch in Banking Subprime Lending Subprime consumer loan portfolios contributed to the large losses associated with recent high-cost bank failures. During 1999, the FDIC reported the first annual loss for the Bank Insurance Fund since 1991. The loss was primarily the result of an uptick in unanticipated and high-cost bank failures. FDIC-insured institutions with at least 20 percent of Tier 1 capital in subprime loans accounted for 6 of the 13 bank failures that occurred between January 1998 and March 2000. Fraud and inappropriate accounting for residuals also played a role in some of these failures.23 23 See Puwalski, Allen. FDIC Division of Insurance. Second quarter 1998. Gain-on-Sale Accounting Can Result in Unstable Capital Ratios and Volatile Earnings. Regional Outlook. http://www.fdic.gov/bank/analytical/regional/ro19982q/atlanta/infocus1.html. Subprime lending remains an area of concern. Insured depository institutions that engage in subprime lending represent a disproportionate share of problem institutions. Of the 79 banks and thrifts on the problem bank list as of year-end 1999, 21 percent were institutions with at least 20 percent of their Tier 1 capital in subprime loans.24 24 The problem bank list includes all insured depository institutions rated a composite "4" or "5." Agricultural Lending While a majority of agricultural institutions remain relatively strong, external conditions have put pressure on some agricultural producers. Many agricultural areas are experiencing low commodity prices as well as weather- and disease-related problems. Strong global competition and high worldwide production over the past several years have resulted in increasing inventories of many crops and poor prospects for a price turnaround in the near term. Moreover, in spite of record government farm payments in 1999, the U.S. Department of Agriculture projects that in the year 2000 one in four farms will not cover cash expenses, up to 20 percent of farmers will experience repayment problems, and 5 percent of farmers will be "vulnerable."25 25 "Vulnerable," as defined by the U.S. Department of Agriculture Economic Research Service, applies to institutions that have debt/asset ratios above 0.40 and negative income such that they cannot meet current expenses or reduce existing indebtedness. Some signs point to growing stress for agricultural institutions. Forty-two percent of FDIC-supervised banks active in agricultural lending showed a moderate or sharp increase in the level of carryover debt during third quarter 1999, compared with just 26 percent during third quarter 1998.26 In addition, net loan loss rates for agricultural production loans increased in 1999 to the highest level since 1991. However, at 0.32 percent, the 1999 net loss rate is just one-tenth the rate experienced during the height of the agricultural crisis of the mid-1980s.27 26 September 1999. FDIC Report on Underwriting Practices. 27 See Anderlik, John M., and Jeffrey W. Walser. FDIC Division of Insurance. Third quarter 1999. Agricultural -Sector Under Stress: The 1980s and Today. Regional Outlook. http://www.fdic.gov/bank/analytical/regional/ro19993q/kc/agricult.html. Operational Risk Operational risks are becoming more prominent in the banking industry. Driven by consolidation and expansion into new product lines and markets, financial institutions are seeing an increase in operational complexity. Operational risk encompasses a host of factors not related to credit or market activities, including risks associated with processing transactions, legal liability, fraud, strategic missteps, and internal control weaknesses. Operational risks tend to be more pronounced when institutions engage in rapid growth, far-flung operations, and complex business processes. Greater attention is being paid to operational risks in the financial industry. Recently, analysts have noted that the pressure to meet ambitious postmerger earnings predictions can result in cost-cutting measures that jeopardize the comprehensiveness and integrity of risk-management systems. In addition, the role that fraud has played in recent bank problems and failures reinforces the importance of adequate internal controls and audit procedures. The significance of operational risks to financial institutions has been noted in industry surveys and information-sharing efforts among financial firms.28 NetRisk Inc., a Greenwich, Connecticut, consulting firm, recently estimated that operational losses among financial institutions have exceeded $40 billion over the past five years. 28 For additional detail, see March 2000. Operational Risk: The Next Frontier. RMA/PricewaterhouseCoopers Survey. April 6, 2000. Tech Bytes: Banks Join Forces Against Operational Risk. American Banker. Return to The Economic Outlook, New York Regional Outlook, 2nd Quarter 2000 Regional Outlook Information Return to New York Edition main page Return to Regional Outlook main page