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

Boston--Commercial lending levels have increased. Small-business lending has grown faster than in previous years at the Region's small institutions.

Chicago--Despite some weakness in the manufacturing sector, economic and banking conditions remained healthy. Recently chartered banks may need to be particularly vigilant about the potential for a reversal of strong economic conditions.

Dallas--Insured financial institutions hold a higher percentage of securities than do institutions in other areas of the country. This asset mix may reduce credit risk, but it could expose institutions to higher levels of interest rate and market risks.

Kansas City--Low agricultural commodity prices remain a concern. Entry by large commercial companies with existing thrift charters or financial services conglomerates could increase the level of competition for small, rural community banks.

Memphis--Favorable banking and economic conditions have led to considerable new bank activity, but the performance of these institutions is declining.

New York--The Region has experienced an increase in new bank activity over the past three years, particularly in New Jersey and Pennsylvania.

San Francisco--Weakness was evident in the aerospace, manufacturing, energy, and agricultural sectors. Depressed commodity prices for some products and declining farm income in certain states caused deterioration in the Region's agricultural banks.