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Camera-ready art of "Regional Outlook" (275Kb PDF file - PDF help or hard copy)
Regional Perspectives
The Region's Economic Conditions--Although the Region's economic growth rate lagged the nation's in 1999, the gap narrowed because of the strong stock market and a growing concentration of new high-value-added jobs. Forecasts by Regional Financial Associates call for the Region's economic growth to continue in 2000 but at a slower pace than the nation's. The strong economy has increased demand for commercial real estate, particularly in large urban areas. As a result, vacancy rates are falling and rents are rising in many of the Region's major cities.
The Region's Banking Conditions--The Region's banks reported generally healthy conditions for the fourth quarter of 1999. Insured institutions benefited from increased noninterest income, stable credit quality, a steeper yield curve, and effective expense control. Lower charge-off rates reported by the Region's credit card specialists partially offset the effect of competitive pressures on margins. Although average credit card delinquency and charge-off rates have improved in the Region, in 1999 the nation's consumer debt service burden reached its highest level in ten years.
Rising Interest Rates Could Pose Risk to the Region's Insured Institutions--The Region could be more sensitive to rising interest rates and changes in mortgage preferences than the nation, because almost one-third of the Region's banks are mortgage specialists, compared with 11 percent of banks elsewhere in the nation. Absent effective interest-rate hedging programs, higher interest rates could hamper earnings if funding costs increase faster than returns earned on assets. Furthermore, because mortgage specialists reported a larger percentage of assets in securities and a greater proportion of longer-term securities than other banks in the Region, the value of their investment portfolios may be more vulnerable in a rising interest rate environment.
By the New York Region Staff
In Focus This Quarter
Banking Risk in the New Economy--This article summarizes current economic conditions, with a primary focus on potential risks to insured depository institutions. It explores the implications of long-term trends that have led to the New Economy. Recent high rates of economic growth with low inflation have been made possible by increases in productivity arising from new technologies, higher investment spending by businesses, and large-scale industrial restructuring. Underlying these trends has been a financial environment that has largely accommodated the growing borrowing needs of consumers and businesses. Market-based financing, provided in large part through securitizations and mutual funds, has made capital readily available to start-up "new economy" firms as well as mature companies that seek to merge or restructure. Despite the clear benefits of market-based financing in supporting economic activity, there are also concerns. A recurrence of financial market turmoil, such as that experienced in fall 1998, has the potential to quickly change the currently positive economic outlook to one that is far more challenging. Detail is provided on commercial credit quality, market sources of revenue, and other risks to watch in banking.
By the Analysis Branch Staff
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