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Camera-ready art of "Regional Outlook" (242Kb PDF file - PDF help or hard copy)
In Focus This Quarter
The Road to Recovery for Commercial Credit Quality: Not without a Few Hurdles Ahead
The recession that began in March 2001 has been especially hard on the corporate sector. Banks that made loans to affected firms felt the immediate effects of the recession
through rising problem commercial loans. Large banks took the brunt of this commercial credit deterioration, as indicated by a somewhat larger uptick in problem commercial
loans among large banks compared with smaller banks. This credit deterioration was more apparent at banks that participated in loan syndications, one of the financing vehicles
available primarily to large corporate customers. Various indicators pointing toward economic recovery, as well as an apparent decline in rating downgrades and default rates among
corporate bond issuers in recent weeks, suggest that improvement in commercial credit quality may be just ahead. This recovery, however, faces a few hurdles, including continued
high leverage, weak earnings, and prospects for a more difficult funding environment, particularly for speculative grade corporations with maturing debt.
By Cecilia Lee Barry, Senior Financial Analyst
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Regional Perspectives |
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Atlanta--Rate/volume analysis suggests that community banks were exposed to heightened interest rate risk during 2001. A rapidly changing yield curve contributed to increased optionality in the loan portfolio, and low short-term rates made repricing of liabilities difficult.
Boston--The effects of the recession varied widely across the New England states. The Region's insured institutions remained healthy overall but showed elevated credit and earnings risk.
Chicago--Most community institutions have weathered the recession fairly well, although moderate credit quality deterioration was widespread and risk management became more of a challenge.
Dallas--The 2002 farm bill is a major departure from the market-oriented approach of the 1996 FAIR Act and continues a high level of government payments to the agricultural sector.
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Kansas City--While many observers believe that Internet technology may enhance the economic viability of rural areas, others suggest that it could increase the ability of larger banks to compete in these areas.
Memphis--Weaker loan demand in late 2001 and early 2002 prompted many of the Region's banks and thrifts to seek improved revenues from securities portfolios, often through the acceptance of increased market risk.
New York--The characteristics of the recent recession and the economic profiles of the Region's major metropolitan areas help explain differences in employment trends, banking performance, and prospects for economic recovery.
San Francisco--Insured institutions have fared better in the recent recession than during the 1990-1991 downturn, despite recurring challenges from weak commercial real estate markets and a large share of newly chartered banks, as well as new risks from subprime lending.
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The third quarter 2002
(page 11)
Regional Outlook issues erroneously stated that community bank mortgage loan portfolios had past-due rates above the peak seen in the early 1990s. In fact, past-due rates were modestly below the prior peak. The remainder of the analysis is unaffected. |
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