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Regional Outlook

Camera-ready art of "Regional Outlook" (437Kb) PDF file - PDF help or hard copy) In Focus This Quarter Economic Conditions and Emerging Risks in Banking--In spite of the lingering effects of the recession that began in March 2001, the banking industry as a whole remains well-capitalized and highly profitable. A steep yield curve has boosted net interest income, more than compensating for the rise in provision expenses associated with higher credit losses. Strength in consumer spending and home building mitigated the effects of the recession and continues to support the recovery as the corporate sector undergoes restructuring. The most likely scenario for the economy over the next few quarters is continued slow growth as the recovery gains momentum. If realized, this scenario could afford banks the benefits of an improving credit picture without dramatically altering the current favorable interest rate environment. Despite the overall positive outlook, there are some areas of concern for the banking industry, such as lingering commercial credit problems, portfolio concentrations in formerly fast-growing metro areas, and subprime mortgage and consumer lending. By Stephen Gabriel, Thomas Murray, and Lisa Ryu

Regional Perspectives
Atlanta--Certain metro areas were ranked according to their vulnerability to weakening in the housing market. Insured institutions' construction and development credit quality could deteriorate in these areas should uncertainty about the housing sector continue. Chicago--Loan quality concerns linger as credit quality improvement is expected to lag the economic recovery. A return to a flatter yield curve could challenge management of interest rate risk. Dallas Midsouth--Lower interest rates benefited net interest margins in second quarter 2002. However, recent narrowing of interest spreads suggests that margins could decline in the near term. Southwest --Weak employment growth is contributing to rising office vacancy rates in some metro areas. At the same time, the insured institutions have significantly increased concentrations of commercial real estate loans.		Kansas City--The drought could cause stress for a large number of the Region's insured institutions. The effects of weakening in commercial real estate markets and earnings pressures are also of concern. New York Mid-Atlantic--Large bank profitability was mixed, with continued weakness in commercial credit quality. Interest rate risk management may be tested following record mortgage originations and changes in the yield curve. New England--Declining employment and earnings in the technology and financial services sectors are dampening regional economic growth. Overall, however, insured institution credit quality remains strong despite weak commercial real estate conditions. San Francisco--Job growth remained sluggish. Earnings and asset quality have deteriorated somewhat among community banks, and improvement in credit quality may lag the economic recovery.

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