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Regional Outlook

Regional Outlook Fourth Quarter 2000

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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


Regional Perspectives
Atlanta--Interest rate risk may be rising among Atlanta Region community banks because of an increase in the net duration of assets, the timing of interest rate changes, and a lag in the repricing of liabilities.

Boston--Slow core deposit growth in the Region has caused institutions to seek alternative funding sources. Increased noncore funding may limit liquidity and increase levels of interest-rate and credit risk.

Chicago--Recent evidence suggests that new banks are exhibiting an increasingly higher risk profile than established banks. Challenges in the auto industry suggest that the industry's strong performance may slow.

Dallas --Many insured institutions in the Region are expanding loan exposure and are migrating into traditionally higher-risk assets when the economy could be slowing, potentially increasing the level of credit risk.

Kansas City--Despite record-high loan-to-asset ratios, the Region's community banks have experienced net interest margin (NIM) compression during the 1990s. Long-term competitive pressures on both sides of the balance sheet have contributed to this NIM compression.

Memphis--With increasing competition compressing net interest margins, many banks are accepting greater levels of credit risk to improve asset yields, which could heighten the vulnerability of the Region's banks to any deterioration in economic conditions.

New York--While housing prices have increased sharply in areas near some of the Region's larger cities, straining home affordability, the strength and duration of the current housing boom have been more modest than the 1980s experience.

San Francisco--Rapid growth in commercial real estate development has occurred in five metropolitan statistical areas; should demand weaken, the potential for overbuilding could exist. Community banks in these areas have experienced rapid loan growth and increased concentrations in commercial real estate and construction and development loans.

Regional Outlook Information
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Last Updated 12/22/2000 insurance-research@fdic.gov