Economic Conditions and Emerging Risks in Banking--
The banking industry continued to perform strongly through fourth quarter 2000 despite a noticeable slowdown in earnings growth. Industry performance during first quarter 2001 is not likely to improve dramatically in light of the recent slowdown in the U.S. economy. Analysts point to certain adverse trends in portfolio characteristics, particularly risk selection and loan concentrations, that could pose risk management problems for certain groups of insured institutions. However, the financial strength of the industry positions it to continue to meet loan demand from creditworthy borrowers.
Reflecting the current uncertainty in the economic outlook, the business press has coined three scenarios as to where the economy could be headed: The V, U, and L scenarios. Analyzing historical relationships between business cycle drivers and banking industry performance, this article considers the implications of these scenarios for bank financial performance.
By the Division of Insurance Staff
Atlanta--Atlanta Region insured institutions may be facing the most challenging environment in nearly a decade as key economic sectors weaken while competition in the banking industry remains strong.
Boston--Strong aggregate capital and earnings are helping to mitigate the effects of any increase in credit and interest rate risk, a continued narrowing of net interest margins, and slower economic growth.
Chicago--Insured institutions’ performance remains favorable. Going forward, bank and thrift will be influenced by how current risk profiles interact with the slowdown in the national economy.
Dallas --The region’s insured institutions are vulnerable to softening in the Commercial real estate sector, higher energy prices, and agricultural borrowers’ growing reliance on off-farm income during a slowing economy.
Kansas City--Government payments and off-farm income have mitigated the effects of depressed farm operating revenues, and as a result, farm banks continue reporting favorable financial conditions.
Memphis--The Memphis Region’s economy slowed sharply during the second half of 2000 and is now considerably weaker than the national economy.
New York--Weakening credit quality, particularly among the Region’s large institutions, could pressure profitability, as loan loss reserves have declined to the lowest level since 1990.
San Francisco--Higher energy prices and power shortages, technology sector weakness, equity market volatility, and softening in the commercial real estate sector could dampen the Region’s otherwise strong economic and banking conditions.
Letter from the Executive Editor
To the Reader:
The goal of the Regional Outlook is to provide useful risk-related information to bankers, banking agency staff, and other interested readers. To do this more effectively, the second quarter 2001 edition has a new look. We are publishing a single national edition that provides an overview of economic and banking risks and discussions of these risks as they relate to insured institutions in each FDIC Region. We tell the national story and, at the same time, alert the reader to specific trends and developments at the regional level.
After considering our experience with this new format, we may adopt it permanently for the second and fourth quarters of each year. The first and third quarter editions will continue to feature in-depth coverage of the economy and banking industry in each Region. Trying new formats will help us find the right balance between regional coverage of specific topics and analysis of economic and banking issues that cut across regional lines.
After you have read this edition of the Regional Outlook, we would like to hear from you. Does this new approach provide a more effective vehicle for reporting on banking and economic trends? What other suggestions do you have for improving our presentation of risk-related information? Call us with your comments at (877) 275-3342 or (800) 925-4618 (TDD) or e-mail them to firstname.lastname@example.org.