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Regional Outlook

In Focus This Quarter In Focus: Economic Conditions and Emerging Risks in Banking Introduction The recession that began in March 2001 appears to have ended in early 2002.1 Still, significant uncertainty remains about the future path of the U.S. economy. In spite of the lingering effects of the recession, Federal Deposit Insurance Corporation (FDIC)-insured banks and thrifts posted record earnings in the first half of 2002. During this period, banks continued to experience rising credit losses, particularly on commercial loans to corporate borrowers. However, a steep yield curve helped boost net interest income, more than offsetting downward pressure on earnings resulting from credit quality deterioration. 1 As of early December, the National Bureau of Economic Research (NBER) has not yet declared the end of recession. The NBER's dating of a recession often lags the cyclical peaks and troughs by several quarters. See http://www.nber.org/cycles/recessions.html Most economists agree that the U.S. economy is likely to grow at a sub-par rate for the next several quarters. Under this "weak growth" scenario, bank earnings are expected to remain strong on the whole. However, risks for the banking sector remain, including a possibility of further credit quality deterioration in commercial loan portfolios, high credit exposure to previously fast-growing metro areas, and the ongoing problems of subprime consumer and mortgage lenders. U.S. Economy: Slow Recovery Appears to Take Hold The U.S. economy appears to be recovering from the mild recession that began in March 2001, but the pace of recovery has been slower than expected. From the peak of payroll employment in March 2001 to the trough in April 2002, the economy lost 1.78 million jobs. Although job growth has been positive in four of the past six months through October 2002, businesses have added only 215,000 jobs, on net, during that period. The weak employment picture thus far suggests that this recovery largely resembles the jobless recovery from the 1990-91 recession, which was also relatively short and mild. It took 34 months to recoup all of the jobs lost during that 9-month recession (see Chart 1). Chart 1 [D] Robust Consumer Spending Has Supported the Economy Consumer spending and home construction continue to be the twin pillars of economic activity. In spite of the weak employment outlook and dismal stock market performance, the average level of consumer spending during the first nine months of 2002 was 3.3 percent higher than year-ago levels. Some of the main drivers behind this robust growth include healthy growth in disposable personal income, low interest rates, and rising home values. Real disposable personal income (real DPI) in the second quarter of 2002 was 4.9 percent higher than a year earlier, a growth rate that slowed somewhat to 3.0 percent in the third quarter.2 While this robust growth in real DPI has been instrumental in supporting consumer spending, it can be argued that the growth was mostly the result of one-time events, including the 2002 tax cut and the extension of benefits paid to unemployed workers (see Chart 2). A declining tax burden and an increase in transfer payments accounted for 74 percent of the change in disposable personal income (net of the inflation adjustment) between second quarter 2001 and second quarter 2002, and 51 percent in third quarter 2002. Without additional fiscal stimulus, these one-time effects largely will expire after the end of this year, returning the burden of income growth to the wages and salaries component. 2 Real DPI takes into account wages and salaries, interest, dividends, rental income, taxes and transfer payments, and measures gains net of the rate of inflation. Chart 2 [D] Lower interest rates and inflation have also bolstered consumer purchasing power, allowing consumers' paychecks to stretch further. Auto dealers' zero-percent financing incentives, introduced in the fall of 2001, have boosted car sales to levels just below the record pace of last year. However, there are some signs that consumers' appetite for new automobiles may be waning. Despite continued availability of zero-interest financing programs, total vehicle sales fell from 18.7 million units in August 2002 to 15.4 million units in October 2002 on a seasonally adjusted annual basis. Historically low mortgage rates continue to bolster the housing sector, which has been a key source of growth for the economy during this downturn. Strong increases in home prices have increased the equity of most U.S. homeowners, and many have converted a portion of their equity to cash through cash-out refinancing.3 Freddie Mac estimates that homeowners took about $59 billion in equity out of their homes during the first nine months of 2002, some of which was used to finance consumer spending and home renovations.4 Other households have chosen to lower their monthly mortgage payments by refinancing at the lowest mortgage rates in more than a generation. 3 Cash-out refinancing refers to mortgage refinancing that results in new mortgages that are at least 5 percent higher in amount than the original mortgages. 4 http://www.freddiemac.com/news/archives/rates/2002/3qupb02.html By some estimates, residential housing market activity contributed as much as 40 percent of net U.S. economic growth last year and more than 20 percent of GDP growth in the first quarter of this year.5 While housing has been a welcome source of support for U.S. economic activity, it should also be recognized that even a slight rise in mortgage rates could sharply curtail refinancing opportunities and slow the rate of appreciation in home values. Because long-term interest rates may rise as economic activity picks up, housing may not play as large a supporting role in the recovery as it did in the recession. 5 Estimates from economy.com. See http://www.homeownershipalliance.com/media/press/pressreleasespressrelease_.060502.html The Corporate Sector Restructures in Response to Declining Profits The corporate business sector is working slowly through problems associated with high debt loads, industrial overcapacity, impaired earnings, and corporate governance scandals. Corporate profits have been weak for more than a year and a half, weighed down by sluggish pricing power and flagging demand. The business sector has responded quickly by restructuring balance sheets and cutting jobs in an effort to restore profits. However, the recovery in corporate profits has been significantly weaker than expected in early 2002. Year-over-year growth in earnings from continuing operations for S&P 500 firms increased by a modest 3.5 percent in second quarter 2002 from a depressed year-ago level. In third quarter 2002, corporate profits rose 8.5 percent from year-ago levels (see Chart 3). Chart 3 [D] Businesses remain cautious amid a weak earnings environment and depressed equity markets. Accordingly, business investment also remains weak. Nonresidential fixed investment shrank by 5.2 percent in 2001, and economists surveyed by the Blue Chip Economic Indicators expect investment spending to contract by another 5.5 percent in 2002 before rising by a modest 4.0 percent next year. By comparison, during the 1992-2000 expansion, annual increases in business fixed investment averaged about 9 percent. The corporate sector continues to suffer from high levels of defaults, rating downgrades, and bankruptcies, although credit quality problems may have peaked in early 2002. According to Moody's, the default rate for U.S. speculative-grade corporate bond issuers fell to 10.4 percent in June 2002 from a peak of 11.5 percent in January 2002. The default rate is expected to fall to 9.2 percent by the end of this year. Telecommunications firms, which were hardest hit by the recession, were responsible for 55 percent of defaults by volume and 37 percent of defaulted issuers in the first half of 2002. Productivity Growth Has Driven the Economy Forward Perhaps the most positive signal to come out of the recent economic data is a resurgence in productivity growth. After slowing sharply in the middle of last year, year-over-year growth in output per hour in the nonfarm business sector surged to 4.4, 4.9, and 5.6 percent, respectively, in the first three quarters of 2002. Although the exact causes of productivity trends cannot be traced precisely, many economists believe that technological innovations of the late 1990s continue to spur the gains in labor productivity.6 And while these figures are subject to downward revision in the future, for now they provide evidence that businesses may be able to cut their costs at the same time workers benefit from higher wages and lower prices. 6 "The Economic Outlook," Testimony of Chairman Alan Greenspan Before the Joint Economic Committee, U.S. Congress, November 13, 2002. Also see Stephen D. Oliner and Daniel E. Sichel, "Information Technology and Productivity: Where Are We Now and Where Are We Going?" The Federal Reserve Board Finance and Economics Discussion Series 2002-29, May 10, 2002, for more in-depth discussion on factors behind recent labor productivity gains. Until recently, evidence indicated that most of the gains of productivity growth were accruing to households. The employment cost index, a measure of changes in average wage and benefit compensation, increased by about 4.2 percent in both 2000 and 2001, well above both prevailing levels of consumer price inflation and increases in output per hour. The recent experience of the U.S. auto industry also shows how consumers have tended to capture productivity gains--as carmakers cut prices with zero-percent financing deals in late 2001 and auto sales boomed to record levels, the U.S. automotive industry as a whole lost $9.5 billion for the year. But there is evidence that businesses are capturing a larger share of the 2002 productivity surge. Much of the recent increase in productivity has resulted not from higher investment spending but from trimming payrolls and using the existing workforce more intensively. During the first three quarters of 2002, productivity gains outstripped the increase in the average employment cost index, which grew by 3.9 percent from the same quarter a year earlier. What this means is that productivity growth increasingly is accruing to the corporate bottom line and may be an inducement to higher investment spending in future quarters. Where Is the Economy Headed from Here? The strength of the current economic recovery may well hinge on the speed of recovery in business investment and the sustainability of consumer spending going forward. The outlook for business investment remains cautious given the relatively modest rebound in corporate earnings and the continuing financial market slump. As the corporate sector tries to shore up its bottom line, employment growth is unlikely to accelerate sharply. Unless the housing sector continues to benefit from historically low mortgage rates and rising home values (a somewhat optimistic scenario), consumer spending may moderate from recent robust levels of growth. At present, it is the apparent rebound in productivity growth that gives analysts hope that the corporate sector can continue to cut costs even as households register wage gains that boost disposable incomes. However, even if this recovery scenario unfolds as hoped, economic activity and total employment are expected to grow at sub-par rates at least until mid-2003. A return to recession (often referred to as the "double-dip" scenario) remains a distinct, though unlikely, possibility. One reason for concern is that an economy growing below its potential is highly vulnerable to shocks that impair confidence and disrupt spending plans. The current environment is rife with potential economic shocks: war with Iraq, a spike in oil prices, international trade frictions, the threat of terrorist attacks, and the emergence of new corporate governance scandals. It is likely that the uncertainties posed by factors such as these already are having a chilling effect on spending and hiring plans. If so, then the successful resolution of these tensions (for example, the conflict with Iraq) could reduce uncertainty and boost economic activity. However, the potential for a shock-induced double-dip recession remains of significant concern to the banking industry, in particular because of the deflationary pressures in the global economy and the dangers that deflation could pose for lenders (see Inset Box). How Real Is the Threat of Deflation in the United States?7 7 As the rate of inflation has declined in recent years, deflation has been more frequently discussed as a threat to the U.S. economy. See Paul Bishop, "How Will the Expansion End?" San Francisco Regional Outlook, second quarter 1998. The minutes of the September 24, 2002, Federal Open Market Committee provide a glimpse into the policy debate about a likelihood of further price disinflation and its effect on the economy.8 As the U.S. economy recovers at a slower-than-expected pace with the inflation rate remaining below 2 percent, policymakers and economists have discussed the possibility of a deflationary scenario developing in the next few quarters. Of particular concern, from a policy point of view, is that the short-term interest rate is near an all-time low, leaving little room for policymakers to maneuver the short-term interest rate in order to boost domestic demand if a deflationary scenario develops. With a half-percentage-point reduction in the target rate on November 6, 2002, the federal funds rate now stands at 1.25 percent, the lowest rate since the late 1950s. 8 Federal Reserve Board, Minutes of the Federal Open Market Committee, September 24, 2002. www.federalreserve.gov/fomc/minutes/20020924.htm. Disinflation refers to the still positive but falling rate of inflation, while deflation refers to a drop in the level of aggregate prices. Whether the current disinflationary trend is a precursor to outright deflation remains to be seen. Some argue that the recent trend in aggregate prices is driven primarily by a few sectors and should not be viewed as an economy-wide trend. Indeed, prices for services such as medical care and education continue to rise at a robust rate even as the overall inflation rate falls. Deflationary pressure is most pronounced in manufacturing sectors where excess capacity and a substantial demand shortfall exist, such as in the telecommunications industry (see Chart 4). The fuel and apparel industries also face significant deflationary pressure, although fuel prices appear to be more dependent on geopolitics than economic conditions going forward. Chart 4 [D] However, as the U.S. economy continues to sort through the imbalances left over from the late 1990s, the falling inflation rate and historically low interest rates leave it vulnerable to deflationary pressure. The equity price bubble of the late 1990s and its subsequent collapse have created a significant mismatch of supply and demand in many sectors of the economy, which may not be resolved without some downward adjustments in prices. A recent study by the Federal Reserve observes that deflation is very difficult to predict in advance, as evidenced by the recent case of Japan.9 The study concludes that the fact that deflation is more costly to the economy than inflation warrants a most aggressive monetary policy response to signs of a disinflationary trend. 9 Alan Ahearne, et al., "Preventing Deflation: Lessons from Japan's Experience in the 1990s," Board of Governors of the Federal Reserve System International Finance Discussion Papers 729, June 2002. Clearly, deflation would have significant adverse effects on the banking industry, depending on its severity and duration. Past episodes of asset and goods price deflation often coincided with banking crises, particularly when the banking sector was already in a weakened financial position. Given the current income and balance sheet strength of the U.S. banking industry, short and mild deflation is likely to have a limited adverse impact. However, prolonged deflation would present more serious challenges to the industry by eroding the collateral value of assets and increasing the real debt burden of borrowers. Deflation could also lead to a decline in nominal income for households and businesses, reducing their ability to repay outstanding debts. In combination, these developments likely would lead to significant credit quality deterioration, while an increase in real interest rates would weaken loan demand. Despite these dangers, there are good reasons to think that serious deflation is unlikely to occur in the United States. One reason is a well-capitalized banking sector with relatively low levels of nonperforming loans. Another is the fact that policymakers appear to be alert to the dangers of deflation and determined to take steps to prevent it from taking hold. Finally, it appears that modern financial instruments and risk management tools contribute to the financial flexibility of households and businesses, reducing the potential for a widespread liquidity crisis. One example is the use of credit derivatives by commercial lenders to off-load credit risk. Another is the benefits of loan prepayment options that allow households and businesses to reduce their interest expenses by refinancing at lower interest rates. Together, these factors limit the possibility of a prolonged deflation that could seriously harm the banking industry. Banks Have Posted Record Earnings Despite the Recession In spite of the recent recession and the slow pace of the apparent recovery, commercial banks posted record earnings of $45.3 billion in the first half of 2002. Earnings were up 16.6 percent from a year earlier. Despite rising loan losses, particularly among large banks that lend to large corporate borrowers, bank earnings have been bolstered by strong gains in net interest income from strong deposit inflows and a steep yield curve (see Table 1). Table 1 [D] In the first half of 2002, commercial banks saw their net interest income increase by $12.8 billion over year-ago levels. This increase was more than twice the growth in loan loss provisions, which rose by $5.6 billion. The disparity between growth in net interest income and loss provisions largely explains why credit quality deterioration associated with the recession has had little effect on overall earnings. If the economy continues on a path of slow recovery, most banks are expected to maintain relatively strong financial positions. The Number of Troubled Institutions Is Rising, but Remains Below Levels of the Early 1990s Supervisory ratings again deteriorated slightly during the first half of the year but remain far stronger on the whole than they were a decade ago. While the number and assets of troubled institutions remain low compared with the early 1990s, a significant upward trend is evident (see Chart 5).10 Approximately 7.3 percent of institutions were rated composite 3, 4, or 5 at September 2002, representing 3.4 percent of the industry's total assets. Nearly 10 percent of institutions had asset quality ratings of 3, 4, or 5 at September 2002, representing 9.7 percent of the industry's assets. Although the number of 3-rated institutions has remained relatively stable since year-end 2000, the number of 4- and 5-rated institutions has increased from 99 at December 2000, to 128 at December 2001, to 148 at September 2002. Chart 5 [D] 10 Supervisory ratings are assigned to banks according to the CAMELS rating system at the end of examinations based on performance in five areas: Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. Bank supervisors assign a 1 to 5 rating for each of these components and a composite rating for the bank. (The composite CAMELS rating does not represent an arithmetic average of assigned component rating, and the weight attributed to any component in determining a bank's overall composite rating depends on the degree of supervisory concern associated with the particular component.) Banks with ratings of 1 or 2 are considered to present few, if any, supervisory concerns, while banks with ratings of 3, 4, or 5 present moderate to extreme degrees of supervisory concern. For this analysis, banks with composite CAMELS ratings of 3, 4, or 5 are referred to as "troubled" institutions. Classified assets at large banks are growing faster than those at community banks.11 As a percentage of Tier 1 capital plus reserves, large banks' classified assets increased to 26.9 percent in the second quarter of 2002 from 17.4 percent two years ago. At community banks this ratio increased to 14.6 percent in the second quarter of 2002 from 12.7 percent at second quarter 2000. One factor driving this trend is the loan mix at large banks compared to the loan portfolio composition of community banks. Commercial and industrial (C&I) loans are typically a higher percentage of total loans at large banks than at community banks. As of June 30, 2002, banks with over $1 billion in assets held C&I loans equal to 21 percent of total loans, compared with just 15 percent for community banks. 11 Community banks are defined as banks with total assets less than $1 billion, while large banks are defined as those with total assets greater than $1 billion. Market Indicators of Large Bank Performance Have Weakened In spite of rising losses in large banks' commercial loan portfolios, the market perception of large banks appears to be mixed. Recent stock market declines have driven the median market-to-book ratio for the 25 largest U.S. banking companies down to 2.0 by September 2002 from a peak of 3.1 in March 1999. Still, the current ratio is significantly above the median ratio of less than 1.0 recorded in December 1990, during the last recession. The Philadelphia Bank Sector Index (24 large banking companies) dropped 14 percent during the year ending September 2002, although the index still managed to outperform the S&P 500 index. The Banking Industry Faces Three Challenges in the Year Ahead Although banking industry performance overall has remained strong in the wake of the recession, certain areas of heightened concern remain. Three areas that might pose problems are continued weakness in commercial credit quality, credit concentrations in formerly fast-growing metro areas, and subprime mortgage and consumer lending. Commercial Credit Quality. Excess capacity and weak pricing power continue to plague most of the business sector. Capacity utilization in U.S. manufacturing, mining, and utilities industries fell from 82.8 percent in June 2000 to 74.4 percent in December 2001, and remained just above 75 percent as of October 2002. For the beleaguered high-tech sector, the capacity utilization rate remains about 63 percent, with the communication equipment sector reporting a capacity rate of less than 50 percent.12 In spite of attempts to cut debt loads, the level of corporate debt remains high relative to internally generated cash flow. The ratio of debt to cash flow for nonfarm, nonfinancial businesses fell from a historical high of 6.24 in 2001 to 6.13 as of June 2002; however, it remains significantly above the historical average of 4.9 percent between 1970 and 2001 (see Chart 6). Chart 6 [D] 12 The high-tech sector includes computers, communications equipment, and semiconductors. The weak economy and the problems of the technology and telecommunications sectors have pushed the percentage of criticized shared national credits (SNCs) to a ten-year high in 2002. Total criticized SNCs increased in 2002 to $236.1 billion (or 12.6 percent of total commitments), from $193 billion (9.4 percent) in 2001.13 13 Criticized credits include loans classified as "substandard," "doubtful," or "loss," plus those rated as "special mention." For more information, see the interagency press release on the 2002 Shared National Credit review at: http://www.fdic.gov/news/news/press/2002/pr10402.html Some 8.4 percent of SNCs ($157.1 billion in commitments) were classified as substandard, doubtful, or loss in the 2002 review. The level of classified credits grew by 34 percent from the year before--a deceleration from the 86 percent rate of increase noted in the previous report. The troubled telecommunications and cable industries accounted for 18.7 percent of all criticized SNCs and about 40 percent of SNC losses in the 2002 review. In 2001, the telecommunications and cable industries represented 9.5 percent of all criticized SNCs. Declining business demand continues to take its toll on office and industrial commercial real estate (CRE) markets. The nation's major office and industrial markets have experienced falling rental rates, rising vacancies, and negative net absorption. The national office vacancy rate climbed to 16.1 percent at the end of September 2002, as declining rental rates and increasing vacancies continued to characterize all major markets. At the same time, the national industrial vacancy rate reached 10.9 percent, exceeding the previous record of 10.8 percent set in 1992.14 14 Torto Wheaton Research, Office and Industrial Outlook, Fall 2002. For perspective, the industrial property vacancy level of 10.9 percent as of September 30, 2002, translates to 1.2 billion square feet of vacant space, up by 50 million square feet from the previous quarter. Although the outlook for CRE markets is rather pessimistic, banks have not yet seen a serious deterioration in CRE loan portfolios. Possible reasons for the apparent resilience of bank CRE portfolios in this cycle include stronger underwriting practices, continued scrutiny by federal bank regulators, increased participation by nonbank lenders, and the resulting scrutiny by market analysts. Still, stresses in CRE markets are starting to show up, with sporadic reports of office properties selling below replacement costs. Sales of properties at prices less than replacement costs were rampant in the late 1980s and early 1990s, resulting in severe loan losses to banks and thrifts and an interruption in commercial development that lasted for several years.15 15 Dean Starkman, "Another Victim of the Bubble: Office Building Prices Decline," Wall Street Journal, October 29, 2002. Credit Concentrations in Formerly Fast-Growing Metro Areas. Growth in economic activity during the 1991-2001 expansion was not uniform across the nation. It tended to be most pronounced in certain metropolitan areas that specialized in high-tech or fast-growing service industries. These areas, in turn, tended to be concentrated in the sunbelt and western states.16 During the expansion, community banks operating in some of these areas accumulated large volumes of commercial and CRE loans relative to equity capital. While these high loan volumes are easy to understand in light of the need to finance high levels of economic activity, they also created concentrations of credit risk. Banks operating with a concentration in high-risk loans (commercial, construction, CRE, and multifamily) are particularly vulnerable to unexpected economic trends in their metro areas.17 16 See "Back to the Future: How This Downturn Compares to Past Recessions," Regional Outlook, second quarter 2002, http://www.fdic.gov/bank/analytical/regional/ro20022q/na/Infocus.html 17 A similar methodology was used in "Back to the Future," Regional Outlook, second quarter 2002, article to identify ten metro areas where credit concentrations were of particular concern. Since the onset of recession in March 2001, a number of these previously fast-growing metropolitan areas have experienced a marked deceleration or outright decline in job growth (Chart 7). An update of a methodology previously used to identify cities with both a concentration of higher-risk loans and significant slowdown in job growth results in a list of 13 cities where credit concentrations are a particular concern: Atlanta, Denver, Grand Rapids, Las Vegas, Orlando, Phoenix, Portland, Salt Lake City, San Francisco/Oakland, San Jose, Sarasota, Seattle, and Tampa.18 The purpose of this exercise is not to pass judgement on specific institutions or loan types, but rather to point to conditions that warrant extra attention to risk management practices on the part of lenders. Chart 7 [D] 18 Eight of the 13 cities in this list were considered "markets at risk" for CRE overbuilding in "Ranking Metropolitan Area's Risk For Commercial Real Estate Overbuilding," Regional Outlook, third quarter 2000 (see http://www.fdic.gov/bank/analytical/regional/ro20003q/na/index.html). Subprime Mortgage and Consumer Lending. Developed largely since the 1990-91 recession, subprime lending (defined as a program of lending to borrowers with limited or impaired credit histories) has been the subject of significant regulatory and market concern during the past few years. Although subprime lenders routinely incur much higher credit losses than prime lenders, they also tend to earn commensurately high returns. Since the onset of recession in March 2001, however, subprime lenders have seen loss rates rise sharply--in many cases well above levels predicted by internal credit models. These unanticipated losses have narrowed the difference in earnings between subprime and prime credit card lenders and are forcing subprime lenders to recalibrate their models. The FDIC currently identifies approximately 125 institutions with subprime loans equal to at least 25 percent of Tier 1 equity capital. Among credit card specialists in this group, net charge-offs in the second quarter of 2002 were 8.4 percent of average outstanding balances, compared with 2.8 percent for credit card specialists that were not also identified as subprime lenders. Subprime credit card specialists reported a 4.2 percent return on assets in the second quarter, compared with a 3.3 percent return on assets for non-subprime credit card specialists. Another source of concern is the continued prevalence of subprime lenders among failed and problem institutions. From the beginning of 1997 through the second quarter of 2002, 31 FDIC-insured institutions with $6.8 billion in assets failed. Of these, 31 percent (holding 64 percent of failed bank assets) had been identified as subprime lenders. Some 88 percent of estimated losses to the insurance funds resulted from the failure of subprime institutions. Subprime institutions continue to be over-represented among troubled institutions. The institutions identified as subprime lenders make up only 1.4 percent of all FDIC-insured institutions. However, subprime lenders account for 8.2 percent of all troubled institutions. Conclusion The recession that began in March 2001 is probably over and, on balance, it has had only limited adverse effects on the overall financial condition of FDIC-insured institutions. Credit losses have risen substantially at large banks that lend heavily to large commercial borrowers, but strong deposit growth and wider net interest margins have helped produce record bank earnings. Strong consumer spending and residential real estate activity have supported the economic recovery to this point, although a continuation of these positive trends is by no means certain. As the corporate sector restructures, the U.S. economy appears to be undergoing a modest recovery similar to the upturn that followed the 1990-91 recession. During this process, risks will predominate on the downside due to the unusually large number of economic and geopolitical uncertainties. These factors, which may be inhibiting economic activity at present, could at some point grow more serious and even threaten to push the economy back into recession. Specific areas of concern for FDIC-insured institutions include (1) continuing credit losses at large banks on loans to large, corporate borrowers, (2) concentrations of credit risk among smaller institutions headquartered in formerly fast-growing metro areas, and (3) subprime lenders, which continue to figure prominently among failed and troubled institutions. Stephen Gabriel, Senior Financial Economist Thomas Murray, Senior Financial Analyst Lisa Ryu, Senior Financial Economist Regional Outlook Information Return to National Edition main page Return to Regional Outlook main page

Last Updated 12/16/2002

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