Back to the Future: How This Downturn Compares to Past Recessions--In March 2001, the U.S. economy entered recession after a record ten years of economic expansion. Recent indicators show that the economy may have begun to emerge from recession during first quarter 2002. But uncertainties remain that could slow or even halt the recovery. Some of the factors contributing to these uncertainties include a continuing earnings slump in the corporate sector and the uninterrupted accumulation of debt by the household sector. Such uncertainties shape the credit risk environment for the banking industry. Subprime, commercial, and commercial real estate and construction lending are all areas of concern where the magnitude of future losses will hinge on the speed and strength of the economic recovery. As bank risk managers continue to size up the effects of this recession on their operating performance, they will need to account for these factors and note the similarities and differences between this recession and previous U.S. downturns.
By Richard A. Brown, Robert Burns, and Lisa Ryu
Atlanta--Economic growth in certain metropolitan markets in the Region has slowed significantly; however, insured institutions in many of these markets are continuing to increase exposures in traditionally higher-risk loan categories.
Boston--The Boston Region is meeting this recession better than it did that of the 1990s. The Region's economic recovery may lag the nation's because of continued weakness among information technology firms. Insured institution credit quality remains sound despite increases in commercial property vacancy rates and the slowing economy.
Chicago--Credit quality deterioration is widespread across loan types but is not severe overall and is variable across the Region. However, allowance coverage of nonperforming loans has dropped significantly.
Dallas --Economic activity slowed during 2001, curbing demand for commercial real estate (CRE). At the same time, the percentage of the Region's insured institutions reporting relatively high CRE concentrations has never been higher.
Kansas City--Provisions of the next farm bill could affect the creditworthiness of borrowers and asset quality among the Region's farm banks. Margin compression continues to pressure profitability among the Region's community banks.
Memphis--Lingering economic weakness in the Region and deteriorating credit quality suggest that continued attention to the allowance for loan and lease losses is needed.
New York--Increased concentrations of long-term assets, particularly among the Region's community banks, have heightened the importance of effective interest rate risk management.
San Francisco--Commercial real estate deterioration, increases in personal bankruptcy rates, and weakness in the tourism sector pressured insured institution credit quality. Also, declining interest rates challenged community bank net interest margins.
The second quarter 2002
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.