FEDERAL DEPOSIT INSURANCE CORPORATION FIRST QUARTER 1997
 

FDIC
 

NEW YORK
 

REGION
 

DIVISION OF
 

INSURANCE
 

SUZANNAH L. SUSSER,
 

SENIOR REGIONAL

 ANALYST
 

NORMAN GERTNER,
 

REGIONAL ECONOMIST
 

In Focus This Quaitei
 

• Consumers Declare Bankruptcy in Record Numbers - Despite 

favorable economic conditions, the number of consumers declaring bankruptcy is on 

the rise in the New York Region. The increases in both personal bankruptcy filings 

and consumer credit losses are part of a national trend which has the attention of 

industry participants, regulators, and Congress. See page 3. 

• Section 936 Repealed - The tax reform provisions contained in the 

“minimum wage” bill (H.R. 3448) repealed Section 936 of the Internal Revenue Code. 

Section 936 provided significant tax incentives to U.S. businesses operating in Puerto 

Rico. See page 6. 

• Savings Association Insurance Fund (SAIF) Capitalized - After more than two years of hard work by regulators, Congress, and the banking and 

thrift industries, the Deposit Insurance Funds Act of 1996 was passed to address the 

serious problems of the SAIF. See page 9. 

Regu[ai Featuies
 

+Regional Economy +Financial and +Regional Banking 

 Commodity Markets 

· Employment & Income · Interest Rates · Bank Earnings 

· Why Region Lags Nation · Bond Values · SAIF Capitalization 

· Industrial Sectors · Bank Stocks · Capital Adequacy 

· Stock Market Activity · New Products · Asset Quality 

· Real Estate Markets · Credit Card Assets 

· Real Estate Lending 

· Underwriting Standards 

· Small Business Market 

· Syndicated Lending 

· Outlook

 See page 12 See page 17 See page 20 

A Publication of the Division of Insurance For Internal Use Only PROTOTYPE
 

Dear Reader, 

The prototype edition of the Regional Outlook for the New York Region is attached. The Regional Outlook is produced by the Division of Insurance (DOI) and is designed to discuss events and trends affecting insured depository 

institutions in your region. This publication will be produced and distributed quarterly in our effort to share information and work with the Divisions of Supervision (DOS) and Compliance and Consumer Affairs (DCA) to identify 

emerging risks to insured depository institutions. 

The publication contains two sections. The first section, In Focus This Quarter, contains several articles which are 

designed to address significant issues affecting insured depository institutions. The articles are not intended to represent an exhaustive coverage of the subject matter or to be examination guidance. The second section, Regular Features, will focus on the Regional Economy, Financial and Commodity Markets, and Banking. This section is not intended to be a substitute for your local or national newspaper but is intended to address some emerging trends and 

relate them to insured depository institutions. 

This publication is regional in focus with individual states and metropolitan areas highlighted where possible. We 

recognize the importance of local economic information to examiners and intend to address that particular need more 

thoroughly in another product. DOI will provide periodic economic analyses at the Field Office level in the future. 

This publication may be distributed on a wider basis in the future, but it was designed largely with an examiner audience in mind. DOI is very appreciative of the time and constructive feedback members of DOS’s and DCA’s 

Chicago staffs provided in the design and testing of the Regional Outlook. Many of the suggestions received from 

those individuals were incorporated into this publication. Your comments on the publication’s format and contents, 

including suggestions for future articles, are welcomed. We also would appreciate your thoughts about the desirability of providing this publication by way of our intra-net homepage, or some other electronic format. 

Sincerely, 

Arthur J. Murton 

Director 

The Regional Outlook is published quarterly by the Division of Insurance of the Federal Deposit Insurance Corporation, 550 17th Street N.W., 

Washington, D.C. 20429. Visit the Division of Insurance online at http://fdic01/division/doi/. For more information on this publication, please call 

Suzannah Susser at (212) 704-1482 or email her at Suzannah L. Susser@DOI@New York. 

The views expressed in the Regional Outlook are those of the authors and do not necessarily reflect official positions of the Federal Deposit Insurance 

Corporation. Some of the information used in the preparation ofthis publication was obtained frompublicly available sources and is considered reliable. 

However, its use does not constitute an endorsement of its accuracy by the Federal Deposit Insurance Corporation. 

Ricki Helfer, Chairman, Federal Deposit Insurance Corporation 

Arthur J. Murton, Director, Division of Insurance 

Editorial Board George E. French, Deputy Director 

Stephen Linehan, Assistant Director, Analysis Branch 

Ronald L. Spieker, Chief, Depository Institutions Analysis Section 

Maureen E. Sweeney, Special Assistant to the Director 

Design and Production Steven E. Cunningham, Senior Financial Analyst 

Diane Ellis, Senior Financial Analyst 

Tom Yeatts, Senior Financial Analyst 

The authors wish to acknowledge the assistance provided by Don Inscoe and Jon Wisnieski of the Division of Research and Statistics in providing 

some of the data used in this publication. Any errors are the responsibility of the authors. We would also like to thank the employees of the Division of 

Supervision and Division of Compliance and Consumer Affairs in the Chicago Region for providing feedback used in the development and design of 

PROTOTYPE
 
 

 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

Consumers Declare Bankruptcy in Record Numbers 

Trend Raises Concerns about Consumer Credit 

• 	 Despite favorable economic conditions, personal 

bankruptcy rates are rising throughout the New 

York Region. 

• 	 The New York Region’s per capita bankruptcy 

rates are favorable compared to the national 

average. Maryland, with the highest rate in the 

Region, is ranked a relatively low twenty-first in 

the country. 

• 	 Credit card charge-offs are approaching recession levels. 

Despite favorable economic conditions, the number of 

consumers declaring bankruptcy is on the rise in the 

New York Region. The increases in both personal 

bankruptcy filings and consumer credit losses are part of 

a national trend which has the attention of industry 

participants, regulators, and Congress. Both the Senate 

and House Banking Committees have held hearings on 

the condition of consumer credit, particularly credit 

card lending. Much of the concern regarding these 

trends is due to the fact that bankruptcy filings and 

charge-offs are rising despite low unemployment and 

rising income levels. 

What Is Occurring in the New York Region? 

Chart 1 shows the rising trend in consumer loan losses 

in the New York Region as well as the close relationCHART 1

ship between these losses and personal bankruptcy filings. 

Table 1 (next page) shows that personal bankruptcy 

rates are rising throughout the Region. Current levels 

are fairly moderate compared to other states in the 

country. Maryland has the twenty-first highest per 

capita filing rate in the nation. Other states in the Region 

and Puerto Rico all have per capita filings below the 

national average. Nevertheless, there has recently been 

rapid growth in filings. Second quarter bankruptcy rates 

in the Region grew an average 24 percent from year-end 

1995 levels. Pennsylvania reported the highest percentage growth rate but still has one of the lowest 

bankruptcy rates in the Region. 

Why Are Consumer Credit Losses Rising in an 

Expanding Economy? 

The emergence of consumer credit problems during an 

expanding economy is not unprecedented. During the 

last economic expansion, consumer delinquency and 

charge-off rates also rose. Consumer debt tends to rise 

when employment rises because households are more 

willing to incur debt and banks are more willing to lend. 

Chart 2 shows that past cycles of rising growth in 

consumer credit have been followed by rising delinquency rates, even during periods of expansion. 

CHART 2

Personal Bankruptcies Correlate with 

Consumer Loan Charge-Offs in the Region 

Filings

(OOOs)

4% 50

40 3% 

30 

2% 

20 

 ss g s 1% 10 

0% 0 

91 92 93 94 95 96 

Sources: Administrative Office of the United States Courts and Bank and 

Thrift Call Reports (RIS). Based on a design by the FDIC's Division of 

Research and Statistics. 

U.S. Consumer Delinquency Rate Tends to 

Rise After Credit Growth Accelerates 

ABA Composite % Change in 

Delinquency Rate Consumer Loans 

30% 2.7% 

2.5% 20% 

2.3% 10% 

2.1% 

0% 1.9% 

1.7% -10% 

80 82 84 86 88 90 92 94 96 

Sources: American Bankers Association and Federal Reserve Flow of 

Funds 

Regional Outlook	 3 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

In Focus This Quarter
 

As the expansion closes out its sixth year, American 

consumers are holding historically high levels of consumer debt -- the ratio of total consumer debt service 

payments, including mortgage, to disposable personal 

income is approaching record highs and is currently at 

17 percent. High debt levels appear to be the result of 

several years of economic expansion along with credit 

card companies’ intensive efforts to generate and feed 

consumers’ appetite for credit. Consumers and their 

lenders are now experiencing the after-effects of this 

credit expansion. 

Why Are Bankruptcy Rates Rising? 

Nonbusiness bankruptcy filings for 1996 will exceed 

one million for the first time in U.S. history. This level 

is 11 percent higher than the peak in the last recession 

and a 14 percent increase over 1995 filings. A variety 

of theories have been advanced to explain this trend. 

These theories include the following: 

• 	 Consumers have overextended themselves. 

• 	 Recent changes in bankruptcy laws make it easier to 

shield assets from creditors. 

• 	 Changes in legal practices promote bankruptcy. 

• 	 The social and financial repercussions associated 

with bankruptcy have diminished. 

In fact, the trend is likely the result of several factors, 

many of which are interrelated. 

A recent study by SMR Research Corporation attributes differences in filing rates more to state regulations than to economic conditions. The study found that 

bankruptcy is driven by the number of and exposure to 

catastrophic events. For example, divorce is often a 

TABLE 1

financial calamity leading people to bankruptcy court 

and is associated with high personal filing rates throughout the country. Other catastrophic events, such as 

automobile accidents and medical emergencies, affect 

people in different states differently (in financial terms) 

because of varying state laws. The report identifies 

other factors driving up bankruptcy rates such as: 

• 	 inadequate health insurance; 

• 	 inadequate auto insurance; 

• 	 a large percentage of self-employed workers; 

• 	 garnishment of wages; and, 

• 	 high debt-to-income ratios. 

All of these conditions increase consumers’ exposure to 

catastrophic events, such as job loss, that are typically 

associated with personal bankruptcy. 

The New York Region measures up fairly well based on 

this study. The Region has a lower than average divorce 

rate, and a lower percent of the population lacks health 

insurance. All of the states in the Region require 

no-fault automobile insurance. The study concludes that 

if these types of conditions are generally favorable, 

consumer debt levels will play a more significant role in 

per capita bankruptcy rates. Maryland, for example, is 

average in the catastrophic events categories but has a 

lower than average ratio of disposable income as a 

percentage of debt. This weakness affects Maryland’s 

bankruptcy rate, but it does not affect it as strongly as the 

other factors. In Pennsylvania, unemployment is above 

the national average, but the catastrophic events measures are all very strong. Pennsylvania has one of the 

lowest bankruptcy rates in the country. 

Puerto Rico’s personal bankruptcy filings are at record 

highs, surpassing the previous record set in 1991. 

Puerto Rico may be an exception to the SMR study. 

BANKRUPTCY RATES PER THOUSAND PERSONS

DELAWARE

WASHINGTON, DC

MARYLAND

NEW JERSEY

NEW YORK

PENNSYLVANIA

PUERTO RICO

UNITED STATES

1991 1992 1993 1994 1995 3RD QTR

1996

ANNUAL.

3RD Q 96

STATE

RANKING

1.66 1.97 1.90 1.56

2.00 2.24 2.02 2.24

2.65 3.09 2.87 2.82

2.71 3.05 2.85 2.83

2.28 2.62 2.53 2.41

1.72 1.87 1.59 1.53

2.39 1.96 1.79 NA

3.46 3.52 3.15 3.00

1.95

2.53

3.26

3.35

2.64

1.88

1.99

3.33

2.41

3.15

4.08

4.05

3.18

2.49

2.59

4.15

46

32

21

23

30

44

43

NA

Source: Bankruptcies - Administrative Office of the United States Courts

 Population - Census Bureau 

Regional Outlook	 4 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

Bankruptcies are attributed to high debt to income ratios 

(exceeding 40 percent); ease of access to credit cards 

and loans, which has increased consumer debt; and poor 

personal financial management. Also, Puerto Rico’s 

economy has been sluggish, and the unemployment rate 

is approximately 14 percent. 

Of interest to lenders is that some traditional early 

warning signs of trouble -- such as erratic missed 

payments or paying off a smaller share of outstanding 

balances -- are not evident this time. Some banks are 

finding that obligations due to them are being wiped 

out in bankruptcy court on accounts that showed no 

prior problems. 

Implications for Insured Institutions 

These trends have raised concerns about the outlook for 

credit card lenders. As shown in Chart 3, credit card 

charge-offs are approaching levels not seen since the 

aftermath of the 1990-1991 recession. During that 

recession, charge-off rates increased sharply. The question arises whether there would be a similar sharp 

increase in credit card losses during a future recession, 

driving credit card loss rates to levels well above their 

previous peak. 

This concern is heightened by a number of factors. 

Consumer debt burdens are at historic highs. Profit 

margins for the nation’s specialty credit card lenders 

(institutions whose total loans exceed 50 percent of 

managed assets and whose credit card loans exceed 50 

percent of total loans) have rapidly narrowed from a 

4.25 percent quarterly return on assets (ROA) in the 

third quarter of 1994 to a 2.02 percent quarterly ROA in 

the third quarter of this year. Competitive pressures on 

pricing and underwriting remain intense, as some companies continue aggressive card solicitations, and there 

are few signs of any slackening of price competition. A 

sharp rate cut for AT&T credit cards, one of the largest 

credit card lenders, is a recent salvo in this price 

competition. Lenders also place great reliance on 

credit scoring models that have not yet been tested in 

a recession and, according to a recent Federal Reserve 

survey, appear overly optimistic in almost two-thirds of 

the banks surveyed. 

Other factors mitigate these concerns to some extent. 

Pricing of credit card loans has traditionally built in a 

margin of comfort for high and volatile losses. Loan 

portfolios are diversified with many small loans to 

individuals. There are preliminary indications that 

lenders and borrowers are retrenching to some extent. 

Consumer credit growth slowed from over 14 percent in 

CHART 3
 

2.5 

3.0 

3.5 

4.0 

4.5 

5.0 

8687888990919293949596 

Source: Federal Reserve Board 

U.S.Credit Card Charge-Offs Are 

Approaching Levels Not Seen 

Since the Last Recession 

Recession 

both 1994 and 1995 to an annualized rate of 8 percent 

(seasonally adjusted) for the first ten months of 1996. In 

the Federal Reserve survey just mentioned two-thirds of 

banks reported raising the score an applicant must 

achieve to qualify for credit, and one-third reduced 

credit limits for existing customers. 

Generalizations about the outlook for credit card lending 

are difficult. Trends that describe the industry on 

average may not hold true for particular institutions. 

Performance is likely to vary substantially, with results 

depending on the risk management practices and underwriting standards of each institution. Given the trends 

outlined above, credit card lending practices appear 

worthy of continued close attention by bankers and 

regulatory agencies. 

Diane Ellis, Senior Financial Analyst 

Suzannah L. Susser, Senior Regional Analyst 

Regional Outlook 5 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

Section 936 Repealed
 

• 	 A provision of the tax code which provided significant tax incentives to U.S. businesses operating in Puerto Rico has been repealed. 

• 	 The repeal of Section 936 has both short- and 

long-term implications for insured banks in 

Puerto Rico. 

• 	 Section 936 also played a much larger role in the 

Puerto Rican economy. 

Tax reform provisions contained in the “minimum 

wage” bill (H.R. 3448) repealed Section 936 of the 

Internal Revenue Code. Section 936 provided significant tax incentives to U.S. businesses operating in 

Puerto Rico. These incentives essentially came in two 

forms: tax credits against earnings derived from a U.S. 

company’s Puerto Rican operations (active income) and 

a tax-free investment vehicle for profits retained in 

Puerto Rico. 

The repeal of Section 936 has both short- and longterm implications for insured banks in Puerto Rico. In 

the short-term, bank liquidity will be threatened to the 

extent U.S. companies reduce their Section 936 passive 

income investments, most of which are held with banks 

TABLE 1

in the form of deposits or securities repurchase agreements. The profitability of some institutions also could 

suffer as banks replace Section 936 funding with higher 

cost alternative funding sources. Over the long-term, 

Puerto Rico’s banks may be affected by any adverse 

economic effects from the repeal of Section 936. These 

effects could be particularly severe if the repeal 

prompts U.S. firms to reduce or eliminate their business 

operations in Puerto Rico. 

The Demise of Section 936 

In 1993, President Clinton began to phase out the 

incentives by limiting the tax credit to one of two 

alternatives: a 60 percent credit for wages and some 

fringe benefits paid to Puerto Rican employees (wage 

credits); or a percentage credit, subject to a phase-out 

schedule, against qualifying income (income credit). 

Section 936 continued to allow U.S. companies to invest 

profits generated by their Puerto Rican operations into 

certain qualified investments that earned interest free of 

any federal taxes (Qualified Possession Source Investment Income Provisions or QPSII). 

On August 20, President Clinton repealed Section 936 

SELECTED FINANCIAL INFORMATION FOR PUERTO RICO'S INSURED COMMERCIAL BANKS

INSTITUTION NAME

SEPT 936 9/30/96 T1 LEV

DEP/TA ASSETS RATIO

YTD 3Q

ROA

YTD 3Q

NIM

ORIENTAL BANK & TRUST 30.46 926,770 8.54 1.65 4.13

THE BANK & TRUST OF PUERTO RICO 27.72 341,026 5.49 0.37 1.96

ROIG COMMERCIAL BANK 21.62 934,403 7.17 0.74 3.94

SCOTIABANK DE PUERTO RICO 28.46 856,143 13.66 1.30 5.54

BANCO CENTRAL HISPANO•PUERTO RICO 27.95 1,626,346 15.62 0.57 3.01

BANCO SANTANDER PUERTO RICO 22.07 4,179,900 9.72 1.04 4.01

BANCO BILBAO VIZCAYA PUERTO RICO 23.50 1,236,129 6.11 0.69 4.23

EUROBANK & TRUST COMPANY 18.11 202,074 7.02 0.41 3.34

PONCEBANK 14.75 1,141,036 7.51 0.98 4.98

WESTERNBANK PUERTO RICO 12.53 1,209,134 5.34 1.42 4.09

BANCO POPULAR DE PUERTO RICO 16.66 13,618,000 6.43 1.18 4.49

FIRSTBANK OF PUERTO RICO 11.65 2,760,285 6.49 1.36 5.84

R•G PREMIER BANK OF PUERTO RICO 17.08 804,758 8.25 0.57 3.78

BANCO FINANCIERO DE PUERTO RICO 0.00 69,433 8.41 1.51 7.27

BANCO DEL COMERCIO DE PUERTO RICO 0.00 80,930 5.17 •0.36 4.98

SOURCES: FINANCIAL INSTITUTIONS COMMISSIONER'S OFFICE SEPTEMBER REPORT AND BANK CALL REPORTS.

Regional Outlook	 6 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

__________________________________________ 

In Focus This Quarter
 

by signing H.R. 3448. Under the new law, no tax credits 

will be available to companies not already claiming the 

credits, retroactive to December 31, 1995. For businesses presently using the credits, the law phases out the 

income credit over ten years. The law retains the 60 

percent wage credit until January 1, 2002, at which time 

the available credit percentage is reduced to 40 percent. 

The wage credit is completely eliminated after 2005. 

Finally, the law eliminates the tax exemption on QPSII 

interest income retroactive to July 1, 1996. 

Because of their prior tax-free status, QPSII funds 

have historically provided Puerto Rico’s banks with a 

significant source of relatively inexpensive funding. 

As of September 30, 1996, QPSII funds invested in 

insured commercial banks totaled $7.9 billion and represented approximately 27 percent of these banks’ total 

funding. Another $3.8 billion in QPSII funds are held in 

brokerages, foreign banks, and nonbanks. The Puerto 

Rico Bankers’ Association estimates that 69 percent of 

QPSII bank deposits carry maturities of six months or 

less. Given the elimination of the tax exemption, many 

fear that a massive repatriation of QPSII funds to the 

U.S. is inevitable. As shown in Table 1 (previous 

page), a number of Puerto Rican banks rely heavily on 

QPSII funding to support their operations. Accordingly, 

the threat of repatriation causes earnings concerns since 

some banks may be forced to pay substantially higher 

rates to replace any lost QPSII funding. Puerto Rico’s 

Treasury Secretary Manuel Diaz Saldana estimates that 

without QPSII funding, banks would pay approximately 

$100 million in additional interest expenses annually, 

which translates into a drop in net interest margins of 30 

to 40 basis points.1 

Mitigating Factors in the Near Term 

Short-term liquidity and earnings concerns are substantially mitigated by the following factors: 

• 	 Repatriated funds are subject to a tollgate tax 

imposed by the Commonwealth of Puerto Rico. 

The tax on repatriated QPSII funds is set at 10 

percent. The rate is lowered to 5 percent for com-

 On October 1, the Puerto Rican government implemented new rules 

that effectively cap the rate banks will pay on existing QPSII deposits. 

The new rules were in response to banks “bidding up” the price of 936 

funding. While the higher bids for QPSII funds may have been a rational 

pricing response meant to compensate depositors for the loss of tax 

benefits, the aggressive bidding also may be indicative of the heavy 

reliance banks have placed on this funding source. Ironically, the government’s new rules may make it more difficult for banks to retain these 

panies that invest at least half of their earnings in 

Puerto Rico for a five-year period. Approximately 

$3.5 billion out of a total $17 billion in QPSII funds 

held with banks, brokerages, and the government 

are subject to the lower tollgate tax rate. 

• 	 A number of Puerto Rico’s banks with significant 

QPSII funding concentrations are owned by large 

foreign parents and therefore have ready access to 

alternate funding sources. Among the independent 

banks, most have sufficient profitability to absorb a 

moderate rise in funding costs (see Table 1 on 

previous page). 

• 	 Since the repeal of Section 936 was widely expected, most institution managers have adopted 

contingency plans for the potential loss of Section 

936 funding. 

• 	 Spreads earned on QPSII funding have been diminished in recent years by Commonwealth rules 

regulating the investment of 936 funds. In 1993, 

institutions were required to retain a portion of 

their Section 936 funds in low-yielding investments 

of two government development banks. Rules 

adopted in the early 1990s also prohibited the 

investment of Section 936 funds in higher yielding 

auto loans. 

Despite the significant disincentives presented by tollgate taxes, many industry officials estimate that as much 

as $10 billion or nearly 60 percent of QPSII funding 

will eventually leave Puerto Rico. The primary determinant of how much QPSII funding ultimately leaves the 

island will depend on alternative investment yields 

available to companies outside of Puerto Rico. 

Longer-term Impact on the Island’s Economy 

Besides the benefits provided to banks by QPSII funding, Section 936 plays a much broader role in Puerto 

Rico’s economy. Economists estimate that businesses 

using Section 936 tax credits provide two-thirds of the 

island’s manufacturing jobs and one in ten of all island 

jobs. The manufacturing sector accounts for 39 percent 

of the island’s gross product. This sector also supports 

the island’s growing service sector (see Chart 1 on next 

page). For example, numerous hotel and condominium 

accommodations are rented to business executives who 

travel to the island in connection with 936 companies. 

Puerto Rico’s Treasury Department reports that in 1995, 

936 companies accounted for an estimated $869 million 

or 16 percent of General Fund Revenues. These 

Regional Outlook	 7 First Quarter 1997 

PROTOTYPE

1 
 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

amounts are exclusive of taxes paid by employees of 

936 companies. 

QPSII funds held with financial institutions and government development banks also play a significant role in 

financing mortgages and local construction projects. 

Many fear that the loss of cheaper QPSII funding will 

lead to higher mortgage interest rates as banks pass on 

their higher funding costs to consumers. Obviously, any 

significant rise in unemployment or deterioration in 

business conditions prompted by the repeal of Section 

936 could pose a threat to the soundness of insured 

Puerto Rico institutions. 

Mitigating Factors in the Longer Term 

There are several arguments downplaying the significance of the repeal of Section 936 on Puerto Rico’s 

economic fortunes. For example, following the percentage reduction of the Section 936 credit in 1993, 

Puerto Rico’s economy continued to grow. Real gross 

product was 2.6 percent in fiscal year 1994 and 3.3 

percent in fiscal year 1995, while the number of jobs 

rose 1.8 percent in 1994 and 2.1 percent in 1995. 

Moreover, the current wage credit will be retained 

through the year 2002, giving the local government 

ample time to implement incentives and/or tax credits to 

facilitate a favorable business climate and promote new 

business development. In this context, the new law 

might be viewed as simply continuing the gradual phase 

out of Section 936 tax benefits that began in 1993. 

Finally, there may be other advantages to doing business 

in Puerto Rico besides previously available tax incenCHART 1

tives; namely, the availability of affordable skilled 

labor and the island’s close proximity to Latin American markets. 

Implications for Insured Institutions 

The threat of a near-term loss of inexpensive QPSII 

funding argues for close monitoring of liquidity conditions for insured Puerto Rican banks. Earnings levels 

also must be reviewed closely in the near term to 

gauge the impact of any replacement of repatriated 

funds. The near-term impact of the repeal on local 

interest rates, particularly consumer mortgage rates, 

also should be measured. In addition, the impact of 

actions taken by Puerto Rico to moderate the impact of 

the repeal should be assessed. The reaction of U.S. 

companies to actions also should be monitored. 

Steven Burton, Senior Financial Analyst 

Suzannah L. Susser, Senior Regional Analyst 

The Manufacturing Sector Accounts for a Significant Segment of Puerto Rico's
 

Gross Product and has Contributed to Growth in the Service Sector
 

Government Agriculture 

Service 

Manufacturing 

39% 

11% 1% Other 

2% 

Source: Puerto Rico, USA Puerto Rico in Figures - General Data 47% 

Regional Outlook 8 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

Savings Association Insurance Fund (SAIF)

 Capitalized
 FDIC Lowers Assessment Rates 

• 	 SAIF was capitalized through a $4.5 billion 

special assessment. Almost 400 banks and 

thrifts in the New York Region paid $753 million of this total. 

• 	 Bank Insurance Fund (BIF) members will bear 

part of the cost of the Financing Corporation 

(FICO) bonds beginning in 1997. 

• 	 The special assessment negatively affects 1996 

operating performance, but earnings prospects 

are greatly enhanced by a proposal to lower 

future SAIF assessment rates. 

Why Was Action Needed? 

After more than two years of hard work by regulators, 

Congress, and the banking and thrift industries, the 

Deposit Insurance Funds Act of 1996 (Act) was 

passed to address the serious problems of the SAIF. 

The difficulties facing the SAIF were substantial and 

demanded a solution. They primarily fell into the 

following areas: 

• 	 SAIF was undercapitalized and there was concern that one large, or several sizable, thrift 

TABLE 1

failures could quickly deplete the fund balance. 

On June 30, 1996, the fund balance was $3.9 

billion, or 0.55 percent of insured deposits, well 

below the target reserve ratio of 1.25 percent of 

insured deposits. 

• 	 Over 45 percent of SAIF assessments were being 

diverted from the SAIF to pay off FICO obligations arising from the thrift failures of the 1980s. 

• 	 The SAIF assessment base continued to shrink, 

with a 22 percent reduction noted from year-end 

1989 to June of 1996. 

• 	 Disparity between SAIF and BIF premiums created strong economic incentives for institutions to 

transfer SAIF-assessable deposits to affiliated 

institutions insured by the BIF, contributing to the 

shrinkage in the SAIF assessment base. 

What Significant Actions Were Taken? 

Special Assessment: In order to address the immediate problems, the Act required the FDIC Board of 

Directors to impose a special assessment of approximately 65.7 basis points on SAIF-member institutions. The special assessment was designed to increase the fund’s level to 1.25 percent of insured 

NEW YORK REGION INSTITUTIONS AFFECTED BY SAIF SPECIAL ASSESSMENT

NUMBER OF INSTITUTIONS

AFFECTED AND TOTALAS•

SESSMENT BY TYPE

MUTUAL SAVINGS S&L STATE NATIONAL

BANKS MEMBER

NON•

MEMBER

TOTAL

DELAWARE

DISTRICT OF COLUMBIA

MARYLAND

NEW JERSEY

NEW YORK

PENNSYLVANIA

PUERTO RICO & VI

0 2 1 0 1

0 1 0 0 2

1 42 28 6 6

24 31 29 3 7

6 24 32 5 5

41 28 46 2 15

0 3 0 0 0

0

0

9

6

9

11

6

4

3

92

100

81

143

9

TOTAL 72 131 136 16 36 0 391

ASSESSMENT ($000S) 108,165 294,562 171,295 25,671 100,619 53,043 753,355

SOURCE: DERIVED FROM EARLY ESTIMATES FROM THE FDIC'S DIVISION OF FINANCE.

Regional Outlook	 9 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

deposits effective October 1, 1996. In determining the 

amount, the Board: 

• 	 Exempted weak and other specifically defined institutions from paying the special assessment. 

• 	 Decreased by 20 percent the amount of SAIFassessable deposits against which the special assessment will be applied for certain Oakar and 

other institutions. (An Oakar institution is a member of one insurance fund that has acquired deposits 

insured by the other fund. The acquired deposits 

retain coverage under the seller’s fund.) 

Early estimates are that there will be fewer than ten 

exempted institutions in the New York Region. This 

number of exempted institutions is small compared with 

the estimated 391 institutions in the Region that paid 

about $753 million to the SAIF in November. As 

Table 1 (previous page) indicates, the special assessment affects more than just thrifts. This is due to the 

substantial number of banks that have acquired SAIF 

deposits through acquisitions or branch purchases over 

the last few years. 

FICO Costs: The recently enacted legislation also 

addressed another legacy of the problems thrifts experiTABLE 2

enced in the 1980s -- FICO bonds issued in 1987 to help 

shore up the former Federal Savings and Loan Insurance 

Corporation (FSLIC). The cost of financing this debt, 

about $800 million per year, was a major reason the 

SAIF had not improved as quickly as the BIF. 

The Act authorized FICO to impose periodic assessments on BIF members in addition to members of SAIF 

that were already being assessed. The FICO charge on 

BIF-assessable deposits must be one-fifth the charge on 

SAIF assessable deposits. As a result, the FICO 

charge on SAIF-assessable deposits for the first semiannual assessment period of 1997 will be 6.48 basis 

points (annualized), and the charge on BIF-assessable 

deposits will be 1.30 basis points (see Table 2). As 

necessary, FICO rates will be adjusted on a quarterly 

basis to reflect changes in the assessable- deposit bases 

for the BIF and the SAIF. Beginning on January 1, 2000, 

or when the insurance funds merge, whichever occurs 

earlier, BIF and SAIF members will share the FICO 

assessment on a pro rata basis. (FICO assessments will 

be paid in addition to the deposit insurance assessments. 

See discussion below.) 

Final Rule to Lower SAIF Assessment Rates: With 

the SAIF now capitalized by the special assessment, the 

FDIC Board of Directors lowered the rates on ongoing 

assessments paid to the SAIF. The Board also widened 

the spread between the lowest and highest rates to 

Regional Outlook 10 First Quarter 1997 

improve the effectiveness of the FDIC’s risk-based 

premium system. 

The final rule establishes an adjusted SAIF rate schedule of 0 to 27 basis points effective for all non-exempt 

institutions beginning January 1, 1997. (Since only 

SAIF-member savings associations must, by law, pay 

for FICO assessments until the end of 1996, a special 

interim rate was established for SAIF-member savings 

associations for the last quarter of 1996.) 

As is noted in Table 2, institutions exempted from 

paying the special assessment will not benefit initially 

from the lower SAIF assessment rates. They will pay 

according to the 23- to 31-basis point schedule through 

year-end 1999, unless they choose to make a pro rata 

payment of the special assessment in the interim. 

Implications for Insured Institutions 

Institutions that are required to pay the SAIF special 

SUMMARY OF 1997 ASSESSMENT

RATES *

1997 ADJUSTED BIF & SAIF SCHEDULE

CAPITAL SUPERVISORY SUBGROUP

GROUP A B C

1 0 3 17

2 3 10 24

3 10 24 27

EXEMPT INSTITUTION SAIF SCHEDULE

1 23 26 29

2 26 29 30

3 29 30 31

FICO ANNUAL RATES

BIF INSTITUTIONS SAIF INSTITUTIONS

1.30 6.48

* CENTS PER $100 OF DOMESTIC DEPOSITS

SOURCE: FDIC'S DIVISION OF INSURANCE

PROTOTYPE
 
 

 

 

 

 

 

 

 

 

 

 

 

In Focus This Quarter
 

assessment should have accrued a liability and an offsetting noninterest expense as of September 30, 1996. 

As a result, many such institutions will reflect much 

lower operating earnings this year. As a result, many 

such institutions will reflect much lower operating earning this year. 

Concerns over the short-term financial impact described 

above are moderated by much brighter future prospects. 

First, the special assessment is a one-time charge and 

should not affect future earnings streams of nonexempt 

institutions. Second, the proposed lower SAIF assessment rates should actually help to boost net income in 

1997. Finally, some observers have noted that the 

resolution of the SAIF’s deficiencies should remove 

uncertainties that may have depressed stock prices of 

SAIF-member institutions. Over the longer-term, the 

capitalization of the SAIF and the change in assessment 

rates also pave the way for a dialogue about a possible 

merger of the two deposit insurance funds. 

John D. Weier, Chicago Senior Regional Analyst 

For More Information 

• SAIF Assessments. FIL-88-96 

• Accounting for the SAIF Special Assessment and 

FICO Assessments. FIL-90-96 

• Federal Register 61, No. 201, pp. 53834-53841: 

Assessments. 

• Federal Register 61, No. 201, pp. 53867-53876: 

Proposed Rules - Assessments. 

• Press Release 79-1996 and 63-1996. 

• Chairman Helfer’s Speeches: July 19, 1996, and 

October 28, 1996. 

Regional Outlook 11 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

Regular Features	 The Regional Economy
 

Region’s Economy Improves Modestly,
 

But Still Lags the Nation
 

• 	 The Region’s economy is expanding at a moderate pace but lags the nation in employment and personal 

income growth. A study links high business costs of large cities to stifled job growth. 

• 	 The stock market is soaring to record levels providing a boost to Wall Street employment. 

• 	 Real estate markets continue to rebound. 

In general, economic growth in the New York Region 

has not kept pace with the nation’s rate of economic 

expansion. Measures of employment and income indicate that the Region has not benefited from the economic recovery to the same degree as the rest of the 

nation. 

Regional Economy Lags Nation in Employment 

and Personal Income Growth 

Table 1 compares employment growth in the states 

comprising the New York Region to the nation. The 

nation’s economy has added over 2 million jobs during 

the past year and its employment base has grown by 2 

percent. In contrast, none of the states in the Region 

(with the exception of Delaware) have kept pace. 

Table 2 compares personal income growth for states in 

the Region to the nation over the past year. Personal 

income consists mainly of wages, salaries and interest 

income, but excludes capital gains. The table illustrates 

TABLE 1

that, with the exception of Delaware, national growth in 

personal income exceeded growth in personal income in 

the states in the Region. 

The main reason for this disparity has been slower 

employment growth in the Region. Over the years, the 

Region has lost a large number of manufacturing jobs to 

the South and overseas. While this trend has abated 

somewhat, much of the new economic growth taking 

place in the nation has been in the Southeast and Rocky 

Mountain states where land, labor, energy and taxes cost 

less. 

While job growth has stabilized or improved somewhat, the Region has been hurt by waves of corporate 

downsizing over the past several years. This situation 

was particularly true in the securities, banking and 

retailing industries during the early stages of the last 

recession. Downsizing has since spread to local 

governments, the defense industry, and health care sectors. 

TABLE 2

NEW YORK REGION LAGS THE NATION

IN JOB GROWTH

(IN MILLIONS)

1995 1996 % CHG

DELAWARE

MARYLAND

NEW JERSEY

NEW YORK

PENNSYLVANIA

PUERTO RICO

3.67 3.75 2.2

2.18 2.19 0.5

3.80 3.83 0.8

7.96 8.04 1.0

5.25 5.27 0.4

0.92 0.93 1.1

U.S. 117.04 119.33 2.0

SOURCE: BUREAU OF LABOR STATISTICS. DATA HAVE BEEN ROUNDED.

EMPLOYMENT STATISTICS FOR 1995 AND 1996 REFLECT PERCENTAGE

CHANGE ON YEAR-TO-DATE AVERAGES THROUGH OCTOBER .

MOST STATES IN THE NEW YORK REGION

LAG THE NATION IN PERSONAL INCOME

GROWTH (IN BILLIONS)

STATE 1995 1996 % CHG

DELAWARE

MARYLAND

NEW JERSEY

NEW YORK

PENNSYLVANIA

PUERTO RICO

 $18.5 $19.7 6.5

131.7 136.6 3.7

235.0 245.3 4.4

498.5 520.5 4.4

281.5 293.8 4.4

NA NA NA

U.S. $6_023.6 $6_341.1 5.3

SOURCE: NATIONAL INCOME AND PRODUCT ACCOUNTS. DATA HAVE

BEEN ROUNDED. PERSONAL INCOME STATISTICS FOR 1995 AND 1996

REFLECT PERCENTAGE CHANGE ON YEAR-TO-DATE AVERAGES THROUGH

JULY.

Regional Outlook	 12 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

Implications: The Region continues to exhibit a 

slower growth pattern than the rest of the nation. 

Historically, it has proven more vulnerable to a 

national recession. This condition was evident during the most recent economic downturn in the early 

1990s, when large parts of the Region entered the 

recession sooner and recovered later. Certain states 

in the Region, particularly New York and New Jersey, 

were hit extremely hard by that recession, which was 

relatively mild nationwide. Another recession would 

seriously hinder loan demand, force bankruptcies and 

otherwise jeopardize the still tenuous economic gains 

the Region has made since the last recession. 

Why Has the Mid-Atlantic Region Lagged the 

Nation? 

A study conducted by Regional Financial Associates, Inc. (RFA) tried to answer that question by studying 

the relationship between business costs and job growth. Using a business cost index that 

incorporates labor and energy 

costs, local taxes, and office 

rents, RFA showed that most 

low cost cities boom, while 

high cost cities either grow slowly or contract. 

The New York Region’s economy is tied to a number 

of high cost cities. The economies of these cities, 

measured by job growth, have either shown anemic 

growth or, in some cases, actually contracted during 

the past five years (see Table 3). 

State taxes vary widely and tend to correlate with job 

creation and destruction. Delaware, the only state in 

TABLE 3

CITY COST INDEX* FIVE -YEAR

JOB GROWTH

(%)**

NEWARK_ NJ 107 1

TRENTON_ NJ 106 2

NEW YORK_ NY 142 -1

LONG ISLAND_ NY 117 2

PHILADELPHIA_ PA 110 -6

PITTSBURGH_ PA 103 4

* 100 = U.S. AVERAGE BUSINESS COST. THE INDEX INCORPORATES

LABOR AND ENERGY COSTS_ LOCAL TAXES AND OFFICE RENTS.

TABLE 4
 

CORRELATION?

STATE AND LOCAL TAXES AND PERCENT CHANGE IN

NUMBER OF JOBS (1990 TO 1996)

STATE TAXES AS % OF FIVE-YEAR JOB

INCOME GROWTH (90-96)

DELAWARE

MARYLAND

NEW JERSEY

NEW YORK

PENNSYLVANIA

U.S. AVERAGE

6.4 9.4

11.5 1.0

12.9 -1.1

16.1 -4.0

12.3 1.8

11.5 9.3

SOURCE: REGIONAL FINANCIAL ASSOCIATES_ INC.

the Region with taxes lower than the national average, is 

the only state which has shown any meaningful job 

growth (see Table 4). On the other hand, New York 

State, with the highest taxes in the Region, had a 4 

percent loss of jobs over the past five years. Furthermore, some cities like New York and Philadelphia 

impose their own tax burden, over and above those 

levied by their states. RFA surmises that the principal 

reason behind the correlation is that young startup 

companies cannot afford to operate in cities with high 

business costs. With advances in information technology making physical location less important for many 

industries, the forces binding businesses to high-cost 

cities become even more tenuous. 

RFA found that the usual state or city government tactics, such as granting businesses one-time tax breaks, 

do not improve an area’s climate for nurturing 

young companies. In fact, granting one-time tax breaks 

encourages established companies to leave, or at least 

threaten to leave, in an attempt to obtain tax breaks, too. 

Implications: With its heavy concentration of large 

high cost cities and without significant changes to tax 

structures, the RFA study suggests that the Region will 

struggle to remain competitive with lower cost cities 

located in other areas of the country. 

Regional Industrial Sectors -- Dependency and 

Diversity 

Selected industries that are important to the Region are 

displayed in Table 5 (next page), which depicts the 

share of labor income from an industry relative to the 

U.S. share. Industries such as finance, insurance, and 

real estate, as well as legal and educational services, 

are more influential to the Region than to the nation as a ** FROM JULY 1991 TO JULY 1996. RESULTS NOT ANNUALIZED.SOURCE: REGIONAL FINANCIAL ASSOCIATES_ INC.

Regional Outlook 13 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

whole. 

The Region’s dependence on the security and commodity brokers sector is heavily skewed by New York’s 

dependence on that sector, which is five times higher 

than the national average. Likewise, dependence on the 

legal services sector is skewed by Washington, D.C.’s 

reliance on that sector. Industries that are vital to 

Pennsylvania’s economy, such as the primary metals, 

chemicals, and coal-related products sectors, are not 

reflected as important to the Region as a whole. A 

similar example is Delaware, where the share of labor 

income from the chemical industry is over nine times the 

national average. 

Stock Market Activity Booms to Record Levels 

The recent rally in the stock market has driven the Dow 

Industrials to over 6,800, with some predicting a Dow 

of 10,000 or even higher by the end of the decade. The 

equity markets have benefited over the past two 

years from a rare combination of strong company 

earnings, low interest rates, and little threat of inflationary pressures. Baby boomers, who see their retirement 

portfolios enhanced by exposure to the markets, have 

TABLE 5

CHART 1
 

0 

1000 

2000 

3000 

4000 

5000 

6000 

7000 

80 85 90 95 

0 

20 

40 

60 

80 

100 

120 

140 

160 

Wall Street Employment Soars with the Dow 

Source: Bureau of Labor Statistics and Dow Jones 

Employment 

Dow 

DJIA 

been placing greater and greater shares of their personal 

wealth in the stock market, hoping that Wall Street will 

fund their children’s college education and their own 

retirement needs. 

The stock market’s strong performance has generated 

significant employment opportunities for stock brokers, 

money managers and other financial specialists. With 

salaries and bonuses among the highest in the nation, 

SELECTED INDUSTRY SECTORS THAT DOMINATE THE NEW YORK REGION ECONOMY RELATIVE TO THE U.S.

THE NEW YORK REGION ISONE AND AHALF TIMESMORE DEPENDENT ON THE FINANCIALSECTOR THAN THEU.S. ECONOMY

REGIONAL SHARE OF LABOR INCOME AS A RATIO TO THE U.S. S HARE

FINANCE_ INSURANCE AND

REAL ESTATE

DEP. ANDNON-DEP.

REDIT C INSTITUTIONS

ECURITY S AND

COMMODITY BROKERS

REAL ESTATE

SERVICES

EGAL L

DUCATIONAL E

OCIAL S SERVICES

MUSEUMS_ BOTANICAL_ �OOLOGICAL GARDENS

OTHER INDUSTRIES

 CHEMICALS

COAL-RELATED

RODUCTS P

PRIMARY METALS

REGION DC DE MD NJ NY PA

1.51 0.64 1.49 1.01 1.05 2.24 0.93

1.31 0.81 3.19 1.00 0.84 1.78 0.92

2.79 0.60 0.64 0.77 1.08 5.55 0.49

1.30 0.90 0.59 1.63 0.96 1.71 0.78

1.12 1.45 0.81 1.16 1.08 1.15 1.05

1.48 4.68 0.99 1.08 0.90 1.79 1.01

1.57 3.10 0.68 1.16 0.81 1.64 2.01

1.42 1.38 1.11 1.15 0.77 1.83 1.34

1.49 1.33 3.35 0.80 0.40 2.35 1.00

1.38 0.05 9.22 0.56 3.01 0.68 1.40

0.87 0.07 1.86 0.24 1.78 0.33 1.49

0.96 0.01 0.58 0.68 0.53 0.35 2.76

SOURCE: BUREAU OF LABOR STATISTICS

Regional Outlook 14 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features The Regional Economy
 

TABLE 6
 

COMMERCIAL VACANCY RATES IN THE NEW YORK REGION HAVE IMPROVED OVER THE DECADE

METRO AREAS 1990 1991 1992 1993 1994 1995 1996*

BALTIMORE 17.3 19.0 21.6 16.7 14.4 13.9 12.7

LONG ISLAND 22.2 18.8 16.3 14.3 13.6 13.8 13.0

NEW YORK CITY 15.4 16.6 16.4 15.2 16.1 14.9 14.2

PHILADELPHIA 16.7 16.5 17.7 16.7 15.2 13.2 13.5

WASHINGTON_ D.C. 16.8 15.0 13.5 11.4 10.4 9.6 9.0

WILMINGTON 27.3 24.4 22.5 19.3 17.8 12.8 14.5

31 MAJOR US MARKETS 18.5 18.9 18.5 17.1 15.3 13.8 13.1

* DATA FOR 1996 REPRESENT THE FIRST HALF OF THE YEAR ONLY.

SOURCE: FDIC_REAL_ESTATE_REPORT, FDIC DIVISION OF RESEARCH AND STATISTICS_ OCTOBER 1996.

Wall Street employees generate large multiplier ef- speculative commercial real estate construction in 

fects in the Region. A strong Wall Street supports the late 1980s, have made substantial progress in 

many peripheral industries such as accounting, com- reducing excess space (see Table 6). A scarcity of 

puter programming, printing and restaurants. building in the early 1990s has reduced vacancies in 

the commercial markets. 

Wall Street employment consists primarily of stock 

and commodity brokers in New York City. Chart 1 Construction markets in New York City, Baltimore, 

(previous page) tracks the relationship between the and Philadelphia are experiencing new activity. 

Dow Industrials and employment on Wall Street. The New York’s downtown and Times Square sections 

two are clearly associated. Most recently, employ- are being revitalized. Baltimore is benefiting from a 

ment on Wall Street surpassed its previous record new “enterprise zone.” Philadelphia is capitalizing on 

which was established just prior to the 1987 stock a general improvement in its local economy. The I-78 

market crash. corridor of New Jersey also is experiencing some 

building activity, but the rest of New Jersey is generImplications: Wall Street is a major engine of eco- ally softer than the Region as a whole. 

nomic growth in the New York Region, particularly 

in New York City and its immediate surrounding Residential Real Estate: Demand for both existing 

areas. While the Dow has con- single- and multi-family homes firmed in the third 

tinued to reach record levels quarter of 1996. For example, in New York State and 

almost every month, a signifi- New Jersey, existing home sales for single-family 

cant correction would almost houses, condominiums and co-ops were up over 6 

certainly negatively affect Wall percent between the third quarter of 1995 and 1996. 

Street employment and the pe- Sales were up about 1 percent 

ripheral industries it supports. in Maryland, but fell 2.6 percent 

A prolonged downturn in the markets could pose in Pennsylvania over the same 

serious risks to the economic health of these areas. time frame. In general, demand 

This sensitivity to the financial markets may be be- continues to be strongest at the 

coming more pronounced as manufacturing industries lower end of the market and 

continue to relocate to lower cost areas. should be strongly influenced 

by the future course of mortgage interest rates. In the 

A major correction in the stock market would put new housing sector, the mid-Atlantic Region has had 

severe stress on banks that engage in equity market- the slowest activity in the nation for many years. 

related activities. It also could be the harbinger of 

another wave of loan and credit card defaults reminis- The Region also lags in price increases of existing 

cent of the late 1980s, early 1990s. homes. During the twelve months ended June 30, 

Real Estate Markets Rebound 1996, prices on existing homes in New York, New 

Jersey, and Pennsylvania rose by 2.9 percent, the 

Commercial Real Estate: The Region’s commercial weakest price appreciation in the U.S. Nationally, 

prices rose an average of 4.7 percent. real estate markets, which were battered by a glut of 

Regional Outlook 15 First Quarter 1997 

PROTOTYPE
 

 

Regular Features The Regional Economy
 

Implications: The current economic environment, 

which is characterized by low inflation rates and 

relatively stable interest rates, is favorable to the 

Region’s real estate markets. Higher interest rates 

could adversely affect the recovery in these markets, 

which have made substantial, albeit gradual, improvement. Higher interest rates also would pose a threat to 

mortgage loan activity, by making it more difficult for 

the average purchaser to afford a house. Such conditions would have a negative impact on the lenders 

providing credit to this sector. 

Norman Gertner, Regional Economist 

Karen A. Denu, Division of Supervision 

Regional Outlook 16 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

Regular Features	 Financial Markets
 

Financial Markets
 

• 	 The Treasury yield curve remains steeper than at the beginning of 1996, but it has flattened since July. 

• 	 The New York Region’s bank stock index has outperformed the S&P 500 so far this year. 

• 	 Evidence suggests that changes in the slope of the short-end of the yield curve may be a good predictor of 

bank stock performance relative to the broader market. 

• 	 New yield curve spread futures and options offer an alternative to managing exposures to twists in the 

yield curve. 

Changes in Interest Rates and Bond Values CHART 1

As reflected in Chart 1, the yield curve has steepened and 

then flattened this year. The 30-year Treasury yield 

peaked on June 12 and July 5 at 7.19 percent -- 124 basis 

points higher than at the beginning of 1996. It has since 

fallen to 6.40 percent. 

To demonstrate the impact that interest rate fluctuations 

may have had on the market value of a bank’s fixed 

income portfolio, Table 1 presents three types of fixed 

income securities common to a bank’s portfolio: a Treasury bond, a FNMA mortgage pass-through, and a 

callable FNMA Agency bond. The value of each bond 

was computed on January 1, July 1, and November 25, 

1996. Table 1 lists the percent change in the value of 

each bond between those dates. 

Together, the bonds lost 5.27 percent of their value 

through July 1, 1996, but they recovered 2.74 percent 

by November. Through the eleven months ending in 

November, the value of the three-bond portfolio was 

down 2.68 percent. On an aggregate basis, the New 

York Region’s banks fared better. The value of securities holdings for all Call Report filers in the Region 

declined by 0.93 percent for the nine months ending in 

TABLE 1

The Treasury Yield Curve in 1996 

5.0 

5.5 

6.0 

6.5 

7.0 

3-mo 2-yr. 7-yr. 30-yr. 

11/25/96 

1/1/96 

7/1/96 

Source: Bloomberg 

Percent 

. 

September. Obviously each institution’s investment 

portfolio performance will vary depending on the types 

of instruments held and the original acquisition price of 

each instrument. 

The New York Region’s Bank Stock PerforEXAMPLE OF RECENT BOND PERFORMANCE

US TREASURY

30-YEAR BOND

$100,000 PAR

7.25% COUPON

7.75 YRS UNTIL MATURITY

FNMA

MORTGAGE PASS-THROUGH

$100,000 PAR

7.5% COUPON

7.59 YRS WAL

FNMA

CALLABLE AGENCY BOND

$100,000 PAR

7.55% COUPON

7.58 YRS UNTIL MATURITY TOTAL

DATE

11/25/96

7/1/96

1/1/96

SOURCE: Bloomberg 

PRICE

$107,375

$103,406

$111,281

CHANGE FROM

PRIOR PERIOD

3.84%

(7.08%)

PRICE

$100,280

$98,130

$102,110

CHANGE FROM

PRIOR PERIOD

2.19%

(3.90%)

PRICE

$102,240

$100,100

$105,020

CHANGE FROM

PRIOR PERIOD

2.14%

(4.68%)

PRICE

$309,895

$301,636

$318,411

CHANGE FROM

PRIOR PERIOD

2.74%

(5.27%)

Regional Outlook	 17 First Quarter 1997 

PROTOTYPE
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regular Features Financial Markets
 

mance 

The stock market generally reacts 

unfavorably to rising interest rates, 

and reflecting this, the S&P 500 

gained only slightly more than 3 

percent through July (the latest peak 

in long-term rates). Since July the 

decline in rates has propelled the 

S&P 500 to new record levels, up 

21 percent this year. The S&P Bank Index, however, 

has performed well for most of the year, despite the 

period of rising rates that occurred during the first two 

quarters of 1996. 

The stellar performance of the money center banks this 

year -- with Citicorp and Chase Manhattan alone up 

over 60 percent on the year -- caused both the S&P 

Bank Index and the New York Regional Bank Index 

(NYRBI) to outperform the S&P 500. The NYRBI, 

created by the Division of Insurance (DOI), consists 

of the New York Region’s 60 members of the American Banker Bank Index, which includes the 225 largest 

publicly-traded banks or bank holding companies. 

The NYRBI, which is weighted by total market value 

of shares outstanding, has gained 39 percent on the 

year, with performance mimicking the S&P Bank 

Index. The close relationship of the two indexes 

results from the NYRBI sharing its nine largest (and 

heaviest weighted) institutions with the S&P Bank 

Index: Bank of New York, Bankers Trust, Citicorp, 

Corestates Financial, Chase Manhattan, J.P. Morgan, 

Mellon Bank, and PNC Bank, and Republic New 

York. 

CHART 2
 

Do Yield Curve Spreads Provide a Peek at Future Bank Stock Performance? 

A recent study by Merrill Lynch suggests that the slope 

of the short-end of the yield curve is a useful predictor 

of near-term bank stock performance relative to the 

broader market. For the period 1950 through 1995, the 

median performance of bank stocks in the study’s universe outperformed the broader S&P 500 index 76 

percent of the time in the twelve months following a 

widening of spreads between the 5-year and 3-month 

Treasuries. In contrast, the median underperformed the 

broader market 75 percent of the time in the twelve 

months following compression in the 5-year and 3-

month spread. Chart 3 on the following page plots this 

concept through 1995. 

The results of this study are intuitive. A steepening 

yield curve favors widening interest margins. The 

opposite is true as the yield curve flattens. 

Did the change in the 5-year/3-month spread over the 

previous year portend the recent strength in bank 

stocks? Not in this case. For the twelve months ending 

October 1996, bank stock performance relative to the 

broader market was strong despite a decline of nearly 

200 basis points in the 5-year/3-month spread during the 

preceding twelve months. 

This recent departure from the historical pattern may 

have resulted from the market’s recognition of 

widespread cost-cutting and “right-sizing” programs, as 

well as merger and acquisition activity. Also, bank 

stock performance has been buoyed by the use of excess 

funds to repurchase outstanding shares at many institutions, which drives earnings per share higher. 

Money Center Banks Drive Both the New York Region's Bank 

Index and the S&P Bank Index to Outperform the S&P 500 

-10% 

0% 

10% 

20% 

30% 

40% 

50% 

5-Jan

19-Jan

2-Feb

16-Feb

1-Mar

15-Mar29-Mar

12-Apr26-Apr

10-May24-May

7-Jun

21-Jun

5-Jul

19-Jul

2-Aug

16-Aug30-Aug13-Sep27-Sep

11-Oct25-Oct

8-Nov

22-Nov

6-Dec 

Change from 1/01/96 

S&P Bank Index 

S&P 500 

New York Regional Bank Index 

Sources: Bloomberg, American Banker 

Regional Outlook 18 First Quarter 1997 

PROTOTYPE
 
 

 

 

 

 

 

 

 

Regular Features Financial Markets
 

A New Product for Managing Exposures to 

Yield Curve Twists 

Managing earnings exposures to changes in the yield 

curve typically requires altering cash 

market positions, executing customized 

financial derivatives, or contracting 

multiple positions in exchange-traded 

derivatives instruments. Recently, the 

Chicago Board of Trade (CBOT) introduced new 

products that may eventually simplify managing this 

risk -- Yield Curve Spread Futures and Futures 

Options (YCSF). 

YCSF contracts are structured so the payoff changes 

only in response to changes in spreads between points 

along the Treasury yield curve, rather than shifts in the 

overall level of interest rates. These instruments may 

provide advantages over hedges involving multiple 

positions in interest rate derivatives that attempt to 

isolate spreads along the yield curve. Ten futures 

contracts with spreads that cover the 2-, 3-, 5-, 10-, 

and 30-year maturity points were initially approved 

for trading. Options on these contracts also are 

traded. 

In theory, YCSFs could be used to construct hedges 

for specific interest-sensitive securities, or more 

macro hedges based on an institution’s overall balance sheet structure. Regardless of how they are used, 

a great degree of sophistication would likely be 

needed to construct meaningful hedges. Insured institutions that execute YCSF contracts should be cognizant of the fundamental risks identified in the FDIC’s 

supervisory policy addressing financial derivatives. 

Initial trading in the YCSFs has been thin and for some 

contracts non-existent. A CBOT representative indiCHART �

cated that position holders have been fairly diversified with most volume being derived from speculators 

and traders for proprietary accounts.

 Allen Puwalski, Banking Analyst

 Steven E. Cunningham, Senior Financial Analyst 

Twists in the Yield Curve Closely Correlate with 

Subsequent-Year Relative Bank Stock Performance 

-300 

-200 

-100 

0 

100 

200 

300 

196019661972197819841990 

5-year, 3-month Spread 

(bp) 

0 

40 

80 

120 

160 

Relative Bank Stock 

Performance 

(1953=100) 

--- Yield Curve Spread 

Sources: Merrill Lynch, Federal Reserve Board

 12-month Lagged Bank Stock Performance Relative to the S&P 500 

Regional Outlook 19 First Quarter 1997 

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Regular Features	 Regional Banking
 

Current Regional Banking Conditions
 

• 	 The strength of the New York Region’s banks reflects the generally favorable economic conditions 

throughout the Region. 

• 	 Core earnings of most insured institutions remain solid; however, third-quarter operating performance at 

a number of institutions was negatively affected by the SAIF special assessment. 

• 	 The asset quality picture remains strong with one notable exception -- credit card lending activities. 

• 	 Competition among banks and nonbanks in a number of traditional business lines presents significant 

challenges. 

Generally favorable economic conditions have aided in 

maintaining the financial health of the New York Region’s banks and thrifts. Financial results and examination ratings paint a strong picture of the industry. Nevertheless, there are some areas of special interest this 

quarter. The first, recognition of the SAIF special 

assessment, was an isolated event which presented an 

answer to previously identified problems (see SAIF 

Capitalized). The other areas, such as rising consumer 

loan losses, concerns over underwriting practices, and 

stiff competition among banks and nonbanks cause some 

concern over where insured institutions may be headed. 

Bank Earnings Still Strong But Decline Slightly 

The Region’s commercial banks have shown consistently strong earnings over the past year. For the nine 

months ended September 30, 1996, the Region reported 

an average net interest margin (NIM) and return on 

assets (ROA) of 4.17 percent and 1.04 percent, respectively, a moderate decline from the 4.27 percent and 

1.14 percent reported for the same period in 1995. 

More than 96 percent of all institutions were profitable. 

Chart 1 presents ROA data for banks and thrifts in states 

comprising the New York Region. 

Contributing to the Region’s decline in ROA was a 13 

basis point decrease in the ratio of noninterest income to 

average assets (to 2.29 percent from 2.62 percent) 

Market sensitive revenues such as trading, equity gains, 

and other securities gains at many large multinational 

banks operating in the Region were lower and contributed to the decline in noninterest income during the 

third quarter. Fee income in the Region declined as a 

percent of average assets, from 0.44 percent on September 30, 1995, to 0.42 percent on September 30, 1996, 

likely as the result of competition. 

Thrift Earnings Affected by SAIF Capitalization 

A number of the New York Region’s insured institutions 

were dramatically affected by the recognition of the 

SAIF special assessment. This third quarter charge was 

estimated to cost the Region’s insured institutions $753 

million. While both banks and thrifts were affected, the 

majority of the cost was borne by thrifts and savings 

banks. Thrift Financial Report filers posted aggregate 

net income of only $36 million for the third quarter 

compared to $323 million in the second quarter. Since 

the special assessment was a one-time charge, profitability for these institutions is expected to improve 

next quarter and should be further enhanced in 1997 due 

to lower assessment rates approved by the FDIC. 

Capital Adequacy Remains High 

Commercial bank capital ratios remain at historically 

CHART 1

0.0 

0.5 

1.0 

1.5 

2.0 

2.5 

DE MD NJ NY PA PR 

Return on Assets Remains Solid Despite Cost of 

Special Assessment 

(YTD 3Q 1996 Annualized) 

Source: Bank and Thrift Call Reports (RIS) 

Bank 

Thrift 

Regional Outlook	 20 First Quarter 1997 

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Regular Features Regional Banking
 

CHART �
 

Charge-Offs in Credit Card Loan Portfolios Exceed Losses in All Other Segments of the Loan Portfolio 

Leases 

Credit Cards 

Installment 

Commercial 

Real Estate 

0.0 1.0 2.0 3.0 4.0 5.0 

Percentage of Loans Charged-Off Over the Past 12 Months 

Source: Bank Call Reports as of 9-30-96 

high levels. The Region’s simple average Tier 1 leverage capital ratio and Tier 1 risk-based capital ratio 

were 10.77 percent and 19.92 percent, respectively, as 

of September 30, 1996. Strong earnings performance 

over the last several years has enhanced capital levels 

significantly. 

In reaction to record levels of capital, many of the 

Region’s banks and thrifts have initiated stock buy-back 

programs. When growth is not a viable option due to 

factors such as market saturation or the high costs 

associated with a merger or acquisition, banks often 

consider an investment in their own stock a good alternative investment. 

Asset Quality Measures are Steady . . . 

The level of nonperforming loans in the Region’s commercial banks has declined slightly over the past year. 

The ratio of noncurrent loans to total loans as of 

September 30, 1996, was 1.49 percent, down from 1.66 

percent at year-end 1995. Asset quality at the Region’s 

thrifts appears satisfactory despite a moderate increase 

in the ratio of noncurrent loans to total loans to 1.85 

percent from 1.62 percent at year-end 1995. 

. . . with the Exception of Credit Card Loans 

One negative note marring the asset quality picture is the 

rise in charge-offs of consumer loans, particularly credit 

card loans. During the first three quarters of this year, 

net charge-offs on credit card loans at the Region’s 

commercial banks rose to 4.51 percent, up from 3.45 

percent at year-end 1995. The quality of credit card 

portfolios is deteriorating at the same time the performance of the remainder of 

the loan portfolio is 

showing improvement. 

Chart 2 shows that net 

charge-offs on credit card 

loans far exceed chargeoffs on other types of loans. 

Delaware Hosts Most of the Region’s Credit 

Card Assets 

In total, the New York Region is home to 34 credit 

card specialty and credit card concentration banks 

(often collectively referred to as credit card banks). 

Delaware hosts all of the Region’s credit card specialty banks. A credit card specialty 

bank is defined as any bank whose 

total loans exceed 50 percent of assets and whose credit card loans 

exceed 50 percent of total loans. The 

concentration of credit card specialty 

banks in Delaware correlates with 

the comparatively high charge-off activity of banks located in the Talleyville, Delaware 

field office shown on Chart 3 (next page). Banks that 

are not credit card specialty banks, but have credit 

card loans exceeding 100 percent of equity capital or 

25 percent of total loans, are considered credit card 

concentration banks. Some institutions designated 

credit card concentration banks are located in other 

states in the Region. 

DE 

Growth in Credit Card Portfolios is Significant 

The median growth rate of the Region’s credit card 

banks was 14.1 percent during the year ending 

June 30, 1996. Growth in unfunded credit card comRegional Outlook 21 First Quarter 1997 

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Regular Features Regional Banking
 

CHART �
 

0 

20 

40 

60 

80 

100 

BAL BEN HAR MHN MET NYE SAN SYR TAL WAY WEX 

0 

1 

2 

3 

4 

A Concentration of Credit Card Loans in Delaware Correlates with Charge-Off Activity 

Source: Bank Call Reports as of 9-30-96 

Credit Card Loan 

Concentration by Field Office 

Percent of Total Loans Charged 

Off in the Last 12 Months 

mitments also has been brisk, with a median growth 

rate of 23.9 percent for the year ended June 30, 1996. 

Given all the recent publicity 

about negative performance trends 

in consumer loan portfolios and 

rising consumer debt levels (See 

Consumers Make a Break for 

Bankruptcy Court), the growth in 

credit card exposures warrants continued close attention by bank management and regulators. In that 

regard, the Office of the Comptroller of the Currency 

(OCC) issued additional guidance to banks during the 

third quarter, focusing on maintaining prudent underwriting standards and controls. 

Real Estate Lending Activities Hold Steady 

Loans secured by real estate increased by 0.4 percent 

in the third quarter of 1996 following a 0.5 percent 

growth rate in the second quarter. Contributing to this 

low growth rate was a 2.2 percent decline in commercial real estate loans. Multi-family real estate loans 

continue to log the strongest growth (4.8 percent during the quarter). However, this 

segment remains a relatively small 

portion of the Region’s real estate 

loan portfolio, equaling just 5.1 

percent of total loans secured by 

real estate in the Region. Multifamily real estate lending is centered in banks located in the Manhattan, New York East, and, to a lesser extent, the 

Syracuse field offices. 

Asset quality measures for real estate loans improved 

during the quarter. Noncurrent real estate loans 

equaled 2.12 percent of all real estate loans compared 

to 2.19 percent in the second quarter and 2.27 percent 

at year-end 1995. This measure is highest in banks 

that have total assets greater than $10 billion (2.64 

percent). 

Competition and Underwriting Standards 

The Region’s examiners registered some concern over 

rising competitive pressures. At the conclusion of 

each examination, examiners complete an underwriting survey developed by the Division of Research and 

Statistics. During 1996, examiners in the states of 

Delaware and New York have noted “above average” 

or “extreme” competitive lending pressures significantly more often than in other states in the Region. 

Also of interest is the Federal Reserve’s November 

1996 Senior Loan Officer Opinion Survey which disclosed modest easing of credit standards for middle 

market and smaller businesses on a nationwide basis. 

Competition for the Small Business Market 

Intensifies 

Similar to national trends, recent reports in the New 

York and Philadelphia areas suggest that larger banks 

are devoting increasing attention to the small business 

lending market, an area traditionally important for 

community banks. Small banks are finding it more 

difficult to compete with some larger banks that are 

willing to offer customers narrow pricing spreads. 

The concern for regulatory agencies is that riskier 

loans are not being priced appropriately due to the 

stiff competition among banks. This could lead to 

trouble in the future if the economy slows significantly. 

Regional Outlook 22 First Quarter 1997 

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Regular Features Regional Banking
 

Syndicated Lending Also Is Heating Up 

Syndicated lending continued at a near record pace in 

the third quarter, driven by merger, acquisition, and 

leveraged buyout activity. Syndicated loans, credits of 

more than $50 million that originators carve up and sell 

to other banks, are expected to total $1 trillion this year. 

Recent trends noted by the OCC indicate that underwriting standards have eroded to a point where further 

deterioration would leave little margin of comfort. Increased competition and large investor appetites have 

contributed to this recent trend. The risks are particularly great for downstream participants, those who buy 

pieces of large loans from other, usually larger, lenders. 

LPC Gold Sheets notes that activity is especially intense in syndicated loans for the communications sector, 

a result of deregulation in the broadcast industry as well 

as consolidation in the wireless and personal communications services industry. Pricing in this sector has 

continued to drop with bankers and investors indicating 

their desire to lend to these companies. 

What To Expect? 

Commercial banks in the Region should continue to 

benefit from the current slow expansion of the economy. 

The industry is expected to continue to report strong 

earnings and solid asset quality, despite some concern 

about consumer loan portfolios. Increasing competition 

in many traditional business lines, however, presents 

significant challenges to banks of all sizes and profiles. 

Suzannah L.Susser, Senior Regional Analyst 

Karen A. Denu, Division of Supervision 

Regional Outlook 23 First Quarter 1997 

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