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Regional Outlook


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In Focus This Quarter

Falling Prices in Commodities and Manufacturing Pose Continuing Risks to Credit Quality --Falling prices are causing problems for a wide range of commodity industries-a collection of agricultural, mining, and manufacturing industries that produce standardized products and face global competition, mostly on the basis of price. Firms in these industries have experienced slow or negative profit growth even as they reduce payrolls to cut costs. There are signs that these trends are contributing to higher credit risk for insured institutions. The effects of these problems on local economies and community banks could grow if low prices persist. By Richard A. Brown and Alan Deaton

Shifting Funding Trends Pose Challenges for Community
Banks --Several long-term trends are making it more difficult for some institutions to economically fund asset growth with deposits in today's marketplace. As a result, traditional measures of liquidity and liability composition for commercial banks reflected record-low levels of deposit funding at year-end 1998. The need to augment lagging deposit growth to meet loan demand has led many community banks to seek more wholesale funding sources, particularly borrowings. If the trend toward greater reliance on nondeposit funding continues, liability management may become more important and more challenging for community banks that have historically relied upon deposits for funding and net interest revenues for profitability. By Allen Puwalski and Brian Kenner

Regional Perspectives

Agricultural and industrial commodity price declines are adversely affecting some Atlanta Region producers --Hog, soybean, and cotton prices have fallen sharply in recent years as a result of low inflationary expectations, excess productive capacity, and weakened global demand. Lower prices have led to reduced farm income and employment in some parts of the Region. Industrial commodities such as steel, textiles and apparels, and pulp and paper also have been hurt by a strong U.S. dollar and financial turmoil overseas. While the Region's overall economy remains strong, the troubled agricultural and manufacturing sectors are largely concentrated in less diverse rural areas where economic growth has been much slower. Persistent price stagnation could lead to further financial stress in these areas, which could negatively affect credit quality at some insured institutions.

Bank funding has changed considerably during this economic expansion and differs from previous cycles --Loan demand has outpaced deposit growth at Atlanta Region commercial banks since the current economic expansion began in 1992. This situation has led to an increase in noncore funding, particularly borrowings, at both large and small banks. A more diverse funding mix may offer advantages with regard to asset and liability management, but it also raises some new potential risks. Many industry observers believe funding issues represent a major long-term challenge to the industry and one that is likely to affect community banks more than large banks.

By the Atlanta Region Staff

Regional Outlook Information
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Last Updated 8/25/1999 insurance-research@fdic.gov