In Focus This Quarter

Indicators of Industry Performance--The reported financial condition of insured banks and thrifts is strong. However, despite projected growth in earnings, bank and thrift stocks underperformed the broader market through October 1999.

Economic Conditions--The economy remains generally strong, and the outlook calls for continued growth. Growth is likely to slow, however, in order to correct financial imbalances that have developed as a result of a rapid creation of household and commercial credit and borrowing from abroad. There is a threat that the adjustment process could be a volatile one.

Emerging Risks in Banking--Rising indebtedness on the part of businesses and households raises concerns about future loan performance. Industry responses to intense competition have created greater credit, market, and operational risks.

Consumer Lending--Banks and thrifts are becoming increasingly involved in subprime consumer lending, which has raised some supervisory concerns.

Commercial and Industrial Lending--Signs of deterioration in corporate credit quality can be found in rising loss rates, slower profit growth, and rising corporate bond defaults. At the same time, banks are expanding their lending to heavily indebted companies in the syndicated loan market.

Commercial Real Estate and Construction Lending--Loans for real estate construction and development are growing rapidly. Despite an uptick in commercial vacancy rates, loan losses remain low.

Agricultural Lending--Low commodity prices are hurting farm operating incomes, but widespread effects on farm banks have yet to materialize.

Funding and Interest Rate Risk--Lagging deposit growth has led to a greater reliance on more volatile, market-based funding, and some institutions are taking on greater interest rate risk to maintain loan growth.

By the Analysis Branch Staff

Regional Perspectives

Economic and Banking Conditions--The Boston Region had a more marked deceleration in job growth than the nation did during the first eight months of 1999; manufacturing continued to shed jobs at a faster pace than the nation…Insured institutions performed well, but some measures of credit quality and profitability showed a modest decline.

Commercial Real Estate Trends--Commercial real estate office markets remained healthy in the Region with declining vacancy rates, while retail and industrial markets showed mixed results during the first half of 1999…Total construction starts fell in the Region, weighed down by declining office starts. Retail and industrial markets experienced increased activity.

Commercial and Small-Business Lending Trends--Commercial lending has increased in the Region, but this could reflect greater loan demand more than an easing in underwriting standards or pricing…Small-business lending is growing faster than in previous years at the Region's small institutions. The Region's large institutions are increasingly using credit scoring.

By the Boston Region Staff