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Camera-ready art of "Regional Outlook" (212Kb PDF file - PDF help or hard copy)
Regional Perspectives
Kansas City Region community banks have experienced compression in net interest margins since 1992 even though they have increased loan-to-asset ratios significantly, a tactic that has helped to boost margins in the past. The compression in net interest margins can be attributed largely to increasing competitive pressures on both sides of the balance sheet. Should the economy weaken, declining loan-to-asset ratios could depress margins further. In addition, many banks have been increasing levels of credit risk or interest rate risk to compensate for narrowing margins, which could heighten their vulnerability to an economic downturn.
By Richard D. Cofer, Jr., Senior Financial Analyst
John M. Anderlik, CFA, Regional Manager
In Focus This Quarter
Emerging Risks in an Aging Economic Expansion--This article focuses on the potential risks of current economic conditions to insured depository institutions. Although the current conditions may appear to be ideal, some imbalances are emerging: rising energy prices, tight labor markets, a less robust stock market, a large trade deficit and strong U.S. dollar, rising household debt burdens, increased corporate leverage and rising potential default risk, and, in some metropolitan areas, overheated housing and commercial real estate markets. At the same time, aggregate risk within the banking industry appears to have risen, as evidenced by softening profitability, growing reliance on noncore funding, heightened levels of interest rate risk, and increasing concentrations in traditionally higher-risk loan categories. A confluence of these trends could heighten the vulnerability of some insured institutions.
By the Division of Insurance Staff
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