Economic Conditions and Emerging Risks in Banking--After slowing significantly during the first eight months of 2001, the U.S. economy suffered an additional shock from the September 11 terrorist attacks on New York and Washington. As a result, most economists now expect the contraction in the economy that began in the third quarter to last at least through the end of the year. The depth and duration of this downturn will be determined by a confluence of factors, including the effects of monetary and fiscal stimulus and the degree of financial vulnerability in the consumer and business sectors.
Overall, the U.S. banking industry appears well positioned to withstand a period of economic adversity and continue to provide credit to finance the economic recovery. This article discusses a combination of factors that may affect some banks-particularly those that rely on rapid loan or new account growth or that exhibit heightened credit risk profiles-in this more challenging economic environment. The article also identifies weaknesses that may exist in some previously booming metro areas as the local economies continue to slow.
By the Division of Insurance Staff
Atlanta--Declining growth in some areas with concentrations in the manufacturing and high-tech sectors has contributed to deterioration in credit quality and could adversely affect banking industry profitability.
Boston--The Region's insured institutions report healthy conditions. However, net interest margin compression and the potential for rising interest rate risk during a slowing economy could pressure earnings.
Chicago--Modest declines in credit quality have become more widespread among insured institutions. Continued slowing of economic conditions and ramifications from the September 11, 2001, attacks could lead to further weakening.
Dallas--Continued stress in the high-tech industry has contributed to softening in certain commercial real estate markets and to overall weakening in the Region's economy this year.
Kansas City--Farm banks in counties with relatively high reliance on government agriculture payments have exhibited higher levels of credit risk and are more vulnerable to any changes in these support programs.
Memphis--Credit quality, already showing some deterioration because of the Region's prolonged weak economic conditions, could decline further should the national economy continue to slow.
New York--Heightened economic uncertainty following September 11 has placed additional pressure on bank earnings and credit quality. However, the Region's insured institutions appear better positioned for an economic downturn than in the early 1990s.
San Francisco--Softening in some commercial real estate markets, deteriorating housing affordability, and increasing stress in the agricultural sector could adversely affect the quality of some real estate and farm loan portfolios.
The fourth quarter 2001
Outlook issues erroneously stated that community bank mortgage loan portfolios had past-due rates above the peak seen in the early 1990s. In fact, past-due rates were modestly below the prior peak. The remainder of the analysis is unaffected.