Regional Outlook
 

FEDERAL DEPOSIT INSURANCE CORPORATION FOURTH QUARTER 2001 

FDIC
 

National
 

Edition
 

Boston 

Chicago 

New 

York 

Atlanta 

Memphis 

San 

Francisco Kansas 

City 

Dallas 

Division of
 

Insurance
 

In Focus This Quarter 

◆ 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. See page 3. 

By the Division of Insurance Staff 

Regional Perspectives 

◆ 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. See page 14. 

◆ 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. See page 17. 

◆ 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. See page 20. 

◆ 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. 

See page 24. 

◆ 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. See page 27. 

◆ 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. 

See page 30. 

◆ 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. See page 34. 

◆ 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. See page 38. 

A Publication of the Division of Insurance 










In Focus This Quarter In Focus This Quarter
 

istics that may result from dynamic economic growth funding than institutions in most other areas of the and rising credit exposure. Most of these additional country. Intense competition for local deposits metropolitan area markets are in the Southeast and has contributed to increased use of noncore 

West. Few are in the Northeast, an area of the funding. Competitive pressures also likely have country that was hit hard during the 1990–1991 affected loan pricing as well as underwriting recession (see box for a discussion of metro- standards at some insured institutions in these 

have high credit exposure if the median concentration ratio for either measure of credit exposure 

among banks and thrifts in the market ranked among 

the top quintile of all markets considered in the 

analysis. 

The 21 markets share other characteristics. In all of 

these markets, rapid loan growth was supported largely 

by higher-cost and potentially more volatile noncore 

funding sources.33 While banks and thrifts nationally 

have relied increasingly on these alternative funding 

sources, insured institutions in these metropolitan markets typically reported a greater reliance on noncore 

markets. In addition, new bank formation is a 

key factor driving competition, a trend that was most 

evident in the Southeast and West during the late 1990s. 

Levels of new bank formation have been particularly 

high in the Grand Rapids, Las Vegas, Naples, 

Phoenix, Portland, Salt Lake City, Sarasota, and 

Seattle markets. 

Economic conditions in some of these markets may 

have weakened somewhat from the generally optimistic 

expectations that developed during the strong expansions in the late 1990s. Portland and San Jose, for 

example, already appeared to be in localized contractions by midyear 2001 because of considerable exposure to a weak high-tech manufacturing sector. Atlanta, 

Memphis, Orlando, and Phoenix also reported substantial slowing during 2000. Additionally, certain of 

the identified markets have high economic exposure to 

33 Noncore funding sources include brokered deposits, certificates of 

deposit of $100,000 or more, Federal Funds purchased, securities sold 

subject to repurchase agreements, and other borrowed funds. The latter category consists largely of Federal Home Loan Bank advances. 

sectors that could be adversely affected by the national 

economic downturn. Las Vegas and Orlando remain 

heavily dependent on tourism, while markets with 

heavy exposure to a weakened air transportation sector, 

such as Fort Worth and Memphis, will be affected by 

reduced air travel and air cargo shipping. Also, real 

estate markets in many of these areas may be vulnerable 

to supply/demand imbalances as the economy slows.34 

Obviously, other banking markets are not immune to the 

risks posed by a national economic downturn. In fact, 

many other markets share some of the same characterpolitan areas at risk in the late 1980s). 

Rapid growth and the acceptance of heightened levels of 

credit risk during the recent expansion enabled many 

banks to achieve extraordinary levels of profitability. 

However, the strategies, policies, and practices that were 

implemented during a more vibrant economy may not be 

appropriate today. Just as past economic strength in many 

metropolitan markets allowed banks more latitude in 

underwriting standards and credit administration practices, the current economic downturn suggests the need 

for increased attention to risk management functions. 

Robert Burns, Senior Financial Analyst 

Lisa Ryu, Financial Economist 

34 Real estate market conditions for many of these markets are discussed in “Slowing Economy Reduces Demand for U.S. Office 

Space,” Regional Outlook, third quarter 2001. Some metropolitan 

areas were not considered in the analysis of real estate conditions 

because of limitations in real estate data availability; therefore, omission from this list does not suggest that specific real estate markets 

are not vulnerable. 

Regional Outlook 12 Fourth Quarter 2001