Outlook
 

WINTER 2005 

In Focus This Quarter: 

A Preliminary Assessment of the Effects of Recent 

Hurricanes on FDIC-Insured Institutions 

Hurricanes Katrina and Rita have taken a heavy toll on the lives and livelihoods of millions of Gulf Coast residents. Even as 

Americans responded to the immediate humanitarian crisis that followed the storms, they gained a new appreciation for the 

economic importance of this region to the rest of the nation. Like other sectors, the region’s banking industry was hit hard by 

Katrina and will be dealing with its consequences for some time to come. This issue of FDIC Outlook provides a preliminary 

assessment of Katrina’s effects on local financial institutions and the regional and national economies. 

Bank Performance after Natural Disasters: FDIC-Insured Institutions Headquartered in the
 

Katrina Disaster Zone A Historical Perspective
 

AL How resilient have banks been in the face of past natural disasters? MS 

This article looks at four natural disasters that have struck the United 

States since 1989 and describes how local banks performed in their LA TX FL aftermath. While no banks are known to have failed as a result of 

these past natural disasters, credit quality deteriorated in some cases. 

Given the unprecedented scale of destruction and displacement resulting from Katrina, it remains to be seen how applicable these lessons 

may be to banks in the hardest-hit Gulf Coast areas. See page 3. 

FEMA Disaster Designation (Individual and FDIC-Insured
 

Public Assistance as of September 8, 2005) Institutions (120) Financial Characteristics of Banks Affected by Katrina
 

Notes: FDIC-insured Institutions are those located in the most severely affected FEMA Focusing on the 49 counties and parishes in Louisiana, Mississippi,
 

Disaster Areas designated for Individual and Public Assistance. Flags are based on Zip
 and Alabama designated as eligible for federal disaster assistance, this Code location and may include more than one bank.
 

Sources: Federal Deposit Insurance Corporation (FDIC) Quarterly Reports of Condition and
 article summarizes the financial condition and performance of local Thrift Financial Reports as of June 30, 2005; Federal Emergency Management Agency (FEMA). 

financial institutions just prior to Katrina. See page 10. 

Unique Challenges Face FDIC-Insured Institutions after Katrina 

In the immediate aftermath of Katrina, banks located in the hardest-hit areas of New Orleans and the Mississippi Gulf Coast 

worked first and foremost to overcome a range of operational difficulties. Depending on the pace and direction of the region’s 

rebuilding effort, individual banks may contend with longer-term issues associated with credit quality and franchise value; however, 

a complete assessment of these longer-term issues may not be possible for some time. See page 12. 

Also in this issue: 

• Hurricane Damage to Oil and Gas Infrastructure Translates into Higher and More Volatile Energy Prices 

See page 19. 

• The Effects of Katrina and Rita on the U.S. Economy and Consumers 

See page 22. 

FEDERAL DEPOSIT INSURANCE CORPORATION 
Letter from the Executive Editor 

December 20, 2005 

To the Reader: 

When we released the Fall 2005 issue of FDIC Outlook in September, bankers and regulators were still 

responding to some of the immediate operational challenges posed by the Gulf Coast hurricanes. As of this 

writing, there remains considerable uncertainty about the ultimate economic losses and how the recovery 

process will unfold. Despite these uncertainties, we feel it is important to share with you what our analysts 

have been able to conclude about the situation thus far. Therefore, we have dedicated this issue of FDIC 

Outlook to evaluating the effects of Hurricane Katrina. 

Our analysis of Katrina does not end with this issue of FDIC Outlook. As more becomes known about the 

course of the recovery and rebuilding efforts, our analysts will evaluate the effects on the local, regional, 

and national economy and the banking industry. We will bring those analyses to you in future editions of 

FDIC Outlook and in other publications such as FDIC State Profiles, FDIC Quarterly Banking Profile, 

and FYI. 

As always, we value your feedback and welcome any comments you might have about this or other issues 

of FDIC Outlook. Please provide them to Barbara Ryan, Associate Director, FDIC Division of Insurance 

and Research, at 202-898-3841 or baryan@fdic.gov. 

Sincerely, 

Maureen E. Sweeney 

Executive Editor 

FDIC OUTLOOK 2 WINTER 2005 
Bank Performance after Natural Disasters: 


A Historical Perspective 

In the weeks following the landfall of Hurricane 

Katrina, when the tremendous scale of the damage and 

dislocation was becoming apparent, analysts turned to 

the question of how financial institutions in the 

affected areas would weather the consequences of the 

storm. One difficulty in conducting this analysis was 

that there is no true historical precedent for regional 

economic losses on the scale of those caused by 

Katrina. Nonetheless, it may be useful to develop 

historical frames of reference for comparison to the 

current situation. A review of banks insured by the 

Federal Deposit Insurance Corporation (FDIC) that 

have failed since 1989 showed that no failures during 

that time could be directly attributed to natural disaster. This circumstance leads to another question: 

Historically, how resilient have banks been in the face 

of natural disasters? In other words, did banks struggle 

immediately following disasters and recover in later 

periods, or did they maintain steady performance 

through the adverse circumstances? 

This article focuses on four natural disasters that struck 

the United States since 1989 and how banks headquartered in the regions most affected by those disasters 

coped with the ensuing circumstances. The disasters 

considered in this analysis are the Loma Prieta earthquake of 1989, Hurricane Andrew of 1992, the Northridge earthquake of 1994, and the Grand Forks flood of 

1997. For each of these four events, the performance of 

affected local financial institutions is compared with 

the performance of institutions at both the state and 

national levels. Four performance ratios are used for 

each comparison: return on average assets, equity capital as a percentage of total assets, loan loss provisions as 

a percentage of total loans, and noncurrent loans as a 

percentage of total loans. To capture only those banks 

that were most affected by the disasters, banks with 

total assets in excess of $5 billion (which are presumed 

to be more geographically diversified) were excluded 

from the analysis. 

Our analysis suggests that, historically, natural disasters 

did not appear to have a significant negative impact on 

bank performance. In fact, performance of banks in 

disaster areas often remained consistent with local and 

national overall trends. 

Loma Prieta Earthquake 

The Loma Prieta earthquake, measuring 6.9 on the 

Richter scale, struck the San Francisco Bay area at 

5:04 p.m. on October 17, 1989. An aftershock with a 

magnitude of 5.2 struck 37 minutes after the initial 

shock. The earthquake epicenter was located in the 

Santa Cruz Mountains, near Loma Prieta peak, approximately 70 miles south of San Francisco. The worst 

damage occurred in the cities of Watsonville and Santa 

Cruz, but there was also considerable damage throughout the San Francisco Bay area, particularly in San 

Francisco and Oakland. The earthquake caused 63 

deaths and 13,757 injuries. More than 1,000 homes 

were destroyed and more than 23,000 were damaged. In 

addition, 366 businesses were destroyed and approximately 3,500 were damaged. The total estimated 

economic loss was valued at more than $16 billion, and 

$7.6 billion in government aid was distributed in the 

affected areas.1 

The performance of 63 financial institutions headquartered in Santa Cruz, San Francisco, and Alameda 

Counties was compared against the broader samples of 

financial institutions from California and across the 

nation. Charts 1 through 4 in Table 1 indicate that the 

performance of the banks in the affected area was not 

noticeably harmed by the earthquake. Loan loss provisions and noncurrent loans increased in the periods 

following the earthquake, but they generally increased 

more slowly than in the state as a whole. Equity capital 

growth exceeded the state and national averages 

following the earthquake. Except for a period immediately following the earthquake, the banks in the area 

generally reported at least as high a return on average 

assets after the earthquake as they had in the quarters 

preceding the disaster. 

1 Mark Zandi, “Katrina: The Economic Fallout,” Moody’s 

Economy.com, August 30, 2005. All damage and aid amounts in this 

article are reflected in 2005 dollars. 

FDIC OUTLOOK 3 WINTER 2005 
In Focus This Quarter: A Preliminary Assessment of Recent Hurricane Effects 

Table 1 

Chart 1 

Return on Average Assets 

Percent 

Source: Federal Deposit Insurance Corporation. 

Loma Prieta Earthquake 

October 17, 1989 

-1% 

0% 

1% 

2% 

3% 

1986 1987 1988 1989 1990 1991 1992 

Institutions Affected by 

Loma Prieta Earthquake 

California 

National 

Chart 2 

Equity Capital as a Percentage of Total Assets 

Source: Federal Deposit Insurance Corporation. 

Percent 

Loma Prieta Earthquake 

October 17, 1989 

1986 1987 1988 1989 1990 1991 1992 

0% 

1% 

2% 

3% 

4% 

5% 

6% 

7% 

8% 

9% 

10% 

Institutions Affected by 

Loma Prieta Earthquake 

California 

National 

Chart 3 

Loan Loss Provisions as a Percentage of Total Loans 

Source: Federal Deposit Insurance Corporation. 

Loma Prieta Earthquake 

October 17, 1989 

Percent 

0% 

1% 

2% 

3% 

4% 

5% 

1986 1987 1988 1989 1990 1991 1992 

Institutions Affected by 

Loma Prieta Earthquake 

California 

National 

Chart 4 

Noncurrent Loans as a Percentage of Total Loans 

Loma Prieta Earthquake 

October 17, 1989 

Percent 

Source: Federal Deposit Insurance Corporation. 

0% 

1% 

2% 

3% 

4% 

5% 

6% 

7% 

8% 

1986 1987 1988 1989 1990 1991 1992 

Institutions Affected by 

Loma Prieta Earthquake 

California 

National 

Note: “Institutions Affected by Loma Prieta Earthquake” include all financial institutions headquartered in Santa Cruz, San Francisco, and Alameda Counties in California with total assets 

less than $5 billion. 

Institutions Affected by the Loma Prieta Earthquake Did Not Exhibit Significant 

Additional Deterioration 

Hurricane Andrew 

Hurricane Andrew was only the third Category 5 hurricane to make landfall in the United States since 1851.2 

Andrew came ashore on August 24, 1992, near Homestead, Florida, carrying maximum sustained winds at 

its initial U.S. landfall around 145 miles per hour, with 

gusts up to 175 miles per hour. Andrew continued to 

2 Hurricane categories, rated on a scale of 1 (lowest wind speed) to 

5 (highest wind speed), are used to estimate the potential property 

damage and flooding expected from a hurricane landfall. See www. 

nhc.noaa.gov/aboutsshs.shtml for more on the hurricane scale. 

move across South Florida as a major hurricane and 

proceeded to the Gulf of Mexico. It eventually made 

landfall again in a sparsely populated section of southcentral Louisiana as a Category 3 hurricane. The 

storm surge generated by Hurricane Andrew ranged 

from 4 to 6 feet in northern Biscayne Bay to a maximum of approximately 17 feet on the western shoreline 

of the bay. The storm surge in Louisiana was at least 

8 feet. Rainfall totaled at least 7 inches in both states, 

and some areas recorded approximately 12 inches.3 

3 National Oceanic and Atmospheric Administration, National Hurricane Center, “Preliminary Report: Hurricane Andrew,” August 1992. 

FDIC OUTLOOK 4 WINTER 2005 
Bank Performance after Natural Disasters: A Historical Perspective 

Table 2 

Institutions in the Area Most Affected by Hurricane Andrew Performed Quite Similarly 

to Institutions throughout Florida and across the Nation 

Chart 5 Chart 6 

Return on Average Assets 

Hurricane Andrew 

August 24, 1992 

Percent 

Source: Federal Deposit Insurance Corporation. 

-1% 

0% 

1% 

2% 

1990 1991 1992 1993 1994 1995 

Institutions Affected by 

Hurricane Andrew 

Florida 

National 

Equity Capital as a Percentage of Total Assets 

Source: Federal Deposit Insurance Corporation. 

Hurricane Andrew 

August 24, 1992 

Percent 

1990 1991 1992 1993 1994 1995 

5% 

6% 

7% 

8% 

9% 

10% 

Institutions Affected by 

Hurricane Andrew 

Florida 

National 

Chart 7 Chart 8 

Loan Loss Provisions as a Percentage of Total Loans 

Percent 

Source: Federal Deposit Insurance Corporation. 

Hurricane Andrew 

August 24, 1992 

1990 1991 1992 1993 1994 1995 

0% 

1% 

2% 

3% 

Institutions Affected 

by Hurricane Andrew 

Florida 

National 

Noncurrent Loans as a Percentage of Total Loans 

Percent 

Source: Federal Deposit Insurance Corporation. 

Hurricane Andrew 

August 24, 1992 

0% 

1% 

2% 

3% 

4% 

5% 

1990 1991 1992 1993 1994 1995 

Institutions Affected by 

Hurricane Andrew 

Florida 

National 

Note: “Institutions Affected by Hurricane Andrew” include all financial institutions headquartered in Dade County, Florida, with total assets less than $5 billion. 

Before Hurricane Katrina, Andrew was considered the 

costliest natural disaster in U.S. history. The economic 

loss was estimated at $48 billion, with the greatest 

damage concentrated in Dade County, Florida. 

Approximately $11 billion in government aid was 

distributed in all affected areas.4 Fifteen lives were lost 

as a result of the storm in Florida, with an additional 

29 lost during the days after the storm hit. A total of 

17 people died in Louisiana.5 

4 See note 1.
 

5 James West, “Hurricanes Are a Regular Part of Life in Louisiana,”
 

USAToday.com, May 17, 2005, www.usatoday.com/weather/hurricane/
 

history/louisiana-hurricanes.htm.
 

Like Katrina, the disruption caused by Andrew was 

enormous. According to the St. Petersburg Times, 

250,000 people in South Florida were left homeless, 

100,000 residents of Dade County left the area permanently, and 82,000 businesses were destroyed.6 

The storm also damaged 33 percent of the coral 

reefs and 90 percent of south Dade’s native pinelands, mangroves, and tropical hardwood. 

6 Jeff Harrington, “After the Storm: Insurance Customers Still 

Paying the Price”; and “After the Storm: Storm’s Howl Fills the 

Ears of Survivors,” St. Petersburg Times, August 18, 2002. Both 

articles are from the series Hurricane Andrew 10 Years Later. 

FDIC OUTLOOK 5 WINTER 2005 
In Focus This Quarter: A Preliminary Assessment of Recent Hurricane Effects 

Because Dade County suffered the most severe damage 

from the storm, our analysis compared the performance 

of 71 banks headquartered in Dade County against totals 

for Florida and the United States as a whole. Charts 5 

through 8 in Table 2 illustrate that the banks headquartered in Dade County performed in a manner quite similar to banks throughout Florida and across the nation. 

The ratio of loan loss provisions to total loans exhibited 

a declining trend after the hurricane, and the noncurrent 

loan ratio continued a generally declining trend as well. 

The Dade County banks did exhibit a slight decline in 

the ratio of equity capital to total assets for a few quarters after the hurricane struck, but this ratio recovered to 

the same level as the state and national averages by yearend 1993. By these measures, banks in Dade County 

proved to be remarkably resilient in the face of the enormous damage caused by Hurricane Andrew.7 

Northridge Earthquake 

The Northridge earthquake occurred on January 17, 

1994, at 4:30 a.m. in Los Angeles, California. 

Although the magnitude was a moderate 6.7 on the 

Richter scale, it was nonetheless one of the most costly 

earthquakes in U.S. history. The epicenter was located 

about 32 miles northwest of downtown Los Angeles. 

Damage extended up to 52 miles away from the epicenter, principally across Los Angeles and Ventura 

Counties. Most of the damage was concentrated in 

the western San Fernando Valley and in the city of 

Santa Monica. The earthquake caused considerable 

damage to freeways in the area, closing 11 major roads 

that lead into Los Angeles. In addition, a number of 

commercial buildings collapsed. Most of the damage 

was caused by the earthquake itself, with some damage 

resulting from fires and ground shift. Fifty-seven people 

died, more than 1,500 were injured, and 22,000 were 

left homeless.8 Loss of life was likely reduced by the 

early morning hour at which the earthquake occurred 

and the fact that January 17 was a federal holiday. 

Economic losses from this disaster were estimated to 

be $33 billion. Approximately $16 billion in government aid was distributed to the affected areas.9 

7 Bradley T. Ewing, Scott E. Hein, and Jamie Brown Kruse, under the
 

auspices of the FDIC’s Center for Financial Research, have conducted
 

statistical analyses of the financial performance of banks after natural
 

disasters, including Hurricane Andrew. Their preliminary report can
 

be found on the FDIC Web site at www.fdic.gov/bank/analytical/cfr/
 

sept_2005/workshop_Be_Sh_Jk.pdf.
 

8 Wikipedia Encyclopedia, “Northridge Earthquake,” http://en.wikipedia.
 

org/wiki/1994_Northridge_Earthquake.
 

9 See note 1.
 

Our analysis compared the performance of 172 financial institutions headquartered in Los Angeles and 

Ventura Counties against the broader samples of financial institutions from California and across the nation. 

Charts 9 through 12 in Table 3 illustrate that before 

the earthquake, banks in the affected counties reflected 

higher ratios of loan loss provisions and noncurrent 

loans to total loans than the comparison groups. The 

ratio of equity capital to total assets was slightly below 

the comparison groups, and the return on average assets 

was actually negative and well below the state and 

national averages. It should be noted that the area most 

affected by the earthquake was already suffering from 

an economic downturn prior to the earthquake and 

that the California group also underperformed relative 

to the rest of the nation. After the earthquake, the 

condition of the banks in the affected area did not 

noticeably worsen relative to the larger groups. Both 

loan loss provisions and noncurrent loans as percentages of total loans generally declined following the 

earthquake. The ratio of equity capital to total assets 

for the banks in the affected area exhibited a strong, 

improving trend in the years following the earthquake. 

Beginning at year-end 1994, return on average assets 

also demonstrated significant improvement. Banks in 

the area affected by the Northridge earthquake continued to struggle in the years after the disaster, but the 

disaster did not appear to contribute significantly to 

those institutions’ difficulties. 

Grand Forks Flood 

On April 16, 1997, the flooding Red River passed the 

National Weather Service’s forecasted crest of 49 feet, 

which equaled the height of the dikes in Grand Forks, 

North Dakota, and East Grand Forks, Minnesota. 

The river actually crested at just more than 54 feet on 

April 21 and did not begin receding until April 26.10 

The resulting flood in Grand Forks caused an estimated 

$2.4 billion in damages. Although this amount is 

considerably smaller than that of the other disasters 

reviewed in this article, the flood is included in the 

analysis because in some ways what happened in Grand 

10 Wikipedia Encyclopedia, “Red River Flood, 1997,” 

http://en.wikipedia.org/wiki/The_1997_Red_River_Flood. The Red 

River is naturally prone to flooding because of its northward flow, 

the small slope of the river, and the flatness of the surrounding 

terrain. Eight major blizzards during the previous winter had 

dumped almost 99 inches of snow on the region, and subsequent 

spring rainstorms contributed to the disaster. 

FDIC OUTLOOK 6 WINTER 2005 
Bank Performance after Natural Disasters: A Historical Perspective 

Table 3 

Institutions Affected by the Northridge Earthquake Generally Demonstrated Improvement 

in the Periods following the Disaster 

Chart 9 Chart 10 

Return on Average Assets 

Northridge 

Earthquake 

January 17, 1994 

Percent 

Source: Federal Deposit Insurance Corporation. 

1991 1992 1993 1994 1995 1996 1997 

-1% 

0% 

1% 

2% 

Institutions Affected by 

Northridge Earthquake 

California 

National 

Equity Capital as a Percentage of Total Assets 

Percent 

10% 

9% 

8% 

7% 

6% 

5% 

Northridge 

Earthquake 

January 17, 1994 

Institutions Affected by 

Northridge Earthquake 

California 

National 

1991 1992 1993 1994 1995 1996 1997 

Source: Federal Deposit Insurance Corporation. 

Chart 11 Chart 12 

Loan Loss Provisions as a Percentage of Total Loans 

Northridge 

Earthquake 

January 17, 1994 

Percent 

Source: Federal Deposit Insurance Corporation. 

1991 1992 1993 1994 1995 1996 1997 

0% 

1% 

2% 

3% 

Institutions Affected by 

Northridge Earthquake 

California 

National 

Noncurrent Loans as a Percentage of Total Loans 

Northridge 

Earthquake 

January 17, 1994 

Percent 

Source: Federal Deposit Insurance Corporation. 

1991 1992 1993 1994 1995 1996 1997 

0% 

1% 

2% 

3% 

4% 

5% 

6% 

7% 

8% 

Institutions Affected by 

Northridge Earthquake 

California 

National 

Note: “Institutions Affected by Northridge Earthquake” include all financial institutions headquartered in Los Angeles and Ventura Counties in California with total assets less than $5 billion. 

Forks was similar — but on a much smaller scale — to 

what has occurred after Katrina. The 1997 Red River 

floodwaters spread over two miles inland, inundating 

virtually everything in the Grand Forks twin communities.11 When the flood receded, 11 buildings downtown 

had burned and about 90 percent of the city of Grand 

Forks was seriously damaged. Some people were unable 

to return to their homes for weeks after the flood 

crested. Although no lives were lost during the flood, 

thousands of people moved from the area. The Grand 

11 Ibid. 

Forks metropolitan area lost 5.8 percent of its population between 1996 and 2000.12 

Our analysis compared the performance of 12 financial institutions headquartered in Grand Forks 

County, North Dakota, and Polk County, 

Minnesota, against the broader samples of financial 

institutions from North Dakota, Minnesota, and 

12 Rob Grunewald, “District Metro Areas — by the Numbers,” 

fedgazette, Federal Reserve Bank of Minneapolis, September 2001, 

http://minneapolisfed.org/pubs/fedgaz/01-09/metro.cfm. 

FDIC OUTLOOK 7 WINTER 2005 
In Focus This Quarter: A Preliminary Assessment of Recent Hurricane Effects 

Table 4 

Chart 13 

Return on Average Assets 

Grand Forks Flood 

April 1997 

Percent 

Source: Federal Deposit Insurance Corporation. 

1994 1995 1996 1997 1998 1999 2000 

0% 

1% 

2% 

3% Institutions Affected by 

Grand Forks Flood 

North Dakota 

Minnesota 

National 

Chart 14 

Equity Capital as a Percentage of Total Assets 

Grand Forks Flood 

April 1997 

Percent 

Source: Federal Deposit Insurance Corporation. 

1994 1995 1996 1997 1998 1999 2000 

7% 

8% 

9% 

10% 

11% 

Institutions Affected by 

Grand Forks Flood 

North Dakota 

Minnesota 

National 

Chart 15 

Loan Loss Provisions as a Percentage of Total Loans 

Grand Forks Flood 

April 1997 

Percent 

Source: Federal Deposit Insurance Corporation. 

0% 

1% 

2% 

1994 1995 1996 1997 1998 1999 2000 

Institutions Affected 

by Grand Forks Flood 

North Dakota 

Minnesota 

National 

Chart 16 

Noncurrent Loans as a Percentage of Total Loans 

Grand Forks Flood 

April 1997 

Percent 

Source: Federal Deposit Insurance Corporation. 

0% 

1% 

2% 

3% 

1994 1995 1996 1997 1998 1999 2000 

Institutions Affected 

by Grand Forks Flood 

North Dakota 

Minnesota 

National 

Note: “Institutions Affected by Grand Forks Flood” include all financial institutions headquartered in Grand Forks County, North Dakota, and Polk County, Minnesota. (All institutions in this 

area had total assets less than $5 billion.) 

Although Asset Quality Indicators Deteriorated after the Grand Forks Flood, 

Earnings Were Stable and Average Capital Increased 

across the nation. As illustrated in Charts 13 through 

16 in Table 4, the banks in the affected area reported 

a significant spike in loan loss provisions for the first 

three quarters after the flood. However, the banks 

were reporting provisions consistent with pre-flood 

levels by the first quarter of 1998. The banks in the 

affected area also reported significantly higher levels 

of noncurrent loans relative to the comparison groups 

from the end of 1997 until year-end 2000. Nevertheless, beginning in the second quarter after the flood, 

the banks in the affected area reflected an increasing 

trend in the ratio of equity capital to total assets, and 

the banks’ return on average assets was virtually 

unchanged from prior periods. 

Conclusion 

Historically, U.S. banks have proven to be resilient in 

the face of natural disasters. While the effects of four 

recent natural disasters on the performance of local 

banks were by no means uniform, in none of the cases 

did banks exhibit significant financial deterioration 

FDIC OUTLOOK 8 WINTER 2005 
Bank Performance after Natural Disasters: A Historical Perspective 

Table 5 

Compared to Recent Historical Precedents, Hurricane Katrina Will Bring Much 


Higher Economic Losses Along with Higher Levels of Disaster Assistance 


(in billions of 2005 dollars)
 

Economic Loss Economic Aid 

Lost Total Insurance Government Total 

Natural Disaster Date Damage Output Loss Payments Aid Aid 

Loma Prieta 

Earthquake Oct. 1989 $10.6 $5.4 $16.0 $1.6 $7.6 $9.2 

Hurricane 

Andrew Aug. 1992 36.7 11.6 48.4 21.5 10.8 32.3 

Northridge 

Earthquake Jan. 1994 20.1 12.5 32.7 3.3 15.5 18.8 

Grand Forks Apr./May 

Flood 1997 N/A N/A 2.0 N/A 1.0 >1.0a 

Hurricane 

Katrina Aug. 2005 N/A N/A 125–150 40–60 >100 >140–160b 

Note: N/A = not available. 

a A breakdown of economic loss between damage and lost output is not available for the Grand Forks flood. Data on insurance payments also are not available; however, insurance costs 

were not extensive, because the majority of the flood damage was not covered in private homeowners’ policies. 

b The loss estimates for Hurricane Katrina are preliminary, and a breakdown between damage and lost output has not yet been quantified. 

Sources: Moody’s Economy.com, Risk Management Solutions, and Congressional Research Service. 

in the years following the events. It is likely that an 

important factor in bank performance after disasters 

is that many losses are reimbursed either by insurance 

or government aid. Other factors may also be at work, 

including the ability of bank managers to adapt to 

challenging circumstances. In short, the banks in our 

review do not appear to be automatically consigned to 

adverse performance when natural disasters occurred. 

This experience, however, may not be directly applicable to the case of Hurricane Katrina. First, the 

magnitude of the damage caused by Katrina is enormous compared to the losses associated with any of 

the previous recent disasters (see Table 5). In fact, 

the economic loss from Katrina may exceed one-andone-half times the economic loss from the other four 

episodes combined. Offsetting these losses will be 

massive inflows of insurance proceeds and government 

aid that will likely amount to two to three times the 

combined aid following the other four disasters. 

However, the long-term socioeconomic impact of 

Hurricane Katrina on the Gulf Coast economy remains 

difficult to predict. Even if environmental damage can 

be remediated and needed repairs can be promptly 

made to levees, roads, and public facilities, it remains to 

be seen how many people will return to New Orleans 

and how quickly business conditions will recover. For 

these reasons, the extent to which this historical experience will apply to Gulf Coast financial institutions 

may not be apparent for some time to come. 

Kristy Frame, Supervisory Examiner 

Lynne Montgomery, Senior Financial Analyst 

Christopher Newbury, Chief, Financial Analysis Section 

FDIC OUTLOOK 9 WINTER 2005 
Financial Characteristics of Banks Affected 

by Katrina 

After Hurricane Katrina struck the Gulf Coast on 

August 29, 2005, the Federal Emergency Management 

Agency (FEMA) designated 49 counties and parishes 

in Louisiana, Mississippi, and Alabama as eligible for 

both individual and public assistance.1 These jurisdictions, or initial “disaster counties,” include the most 

devastated coastal areas and contain the headquarters 

of 120 commercial banks and savings institutions 

insured by the Federal Deposit Insurance Corporation 

(FDIC). These are the institutions that are likely to 

experience the most significant impact from Katrina. 

Most of these 120 institutions are relatively small 

community banks. About three-fourths of them have 

less than $250 million in assets, and only five have 

more than $1 billion in assets. They are overwhelmingly locally focused — almost three out of four (73 

percent) obtain 100 percent of their deposits from 

within the disaster counties, and only five institutions 

obtain more than half their deposits from outside this 

area. Consequently, the outlook for this group of institutions is inextricably tied to the prospects of the 

economies within the initial disaster zone. 

Table 1 

To get a sense of the relative strength and operating 

characteristics of financial institutions in the initial 

Katrina disaster counties, we can compare them with 

all small FDIC-insured institutions, defined here as 

those with less than $1 billion in assets. Table 1 

provides some comparative condition and performance 

ratios for the institutions in the Katrina disaster area 

and for small institutions nationwide. Financial institutions have three lines of defense against credit losses: 

earnings, reserves, and capital. The data in Table 1 

show that, prior to the arrival of Hurricane Katrina, the 

banks and savings institutions in the Katrina counties 

had earnings and reserves that were above the national 

average, while their capital was lower. 

The average return on assets, a basic yardstick of earnings performance, was five basis points higher for the 

Katrina institutions than for small institutions as a 

whole. Higher net interest margins, which represent the 

difference between the average yield that institutions 

earn on their interest-bearing assets and the average 

interest expense of funding those assets, were largely 

responsible for the better profitability. The ratio of 

FDIC-Insured Institutions Most Affected by Hurricane Katrina Compared to 

All Institutions with Less Than $1 Billion in Assets 

(as of June 30, 2005) 

All Insured Institutions with 

Katrina Institutions Less Than $1 Billion in Assets 

Number of Institutions 120 8,262 

Tier 1 Capital (% of total assets) 8.67% 9.91% 

Return on Assets (year-to-date, annualized) 1.31% 1.21% 

Net Interest Margin (year-to-date, annualized) 4.26% 4.09% 

Noncurrent Loans (% of total loans) 0.61% 0.68% 

Net Charge-Off Rate (year-to-date, annualized) 0.24% 0.17% 

Reserves/Noncurrent Loans 215.9% 182.5% 

Deposits/Assets 79.5% 80.1% 

Loans/Assets 69.0% 66.4% 

Note: Katrina institutions include all FDIC-insured commercial banks and savings institutions headquartered in 3 counties in Alabama, 30 parishes in Louisiana, and 15 counties in Mississippi. 

Sources: Federal Deposit Insurance Corporation (FDIC) Quarterly Reports of Condition and Thrift Financial Reports. 

1 Based on FEMA designations as of September 8, 2005. 

FDIC OUTLOOK 10 WINTER 2005 
Financial Characteristics of Banks Affected by Katrina 

reserves to noncurrent loans shows that the Katrina 

institutions held more in reserves for every $1.00 of 

noncurrent loans than the national average ($2.16 

versus $1.83).2 The average capital level for the Katrina 

group was more than 1 percentage point lower than the 

average for all small institutions, but 119 of the 120 

institutions in the Katrina group met or exceeded the 

highest federal regulatory capital standards as of June 30. 

A comparison of loan portfolios reveals additional 

differences between institutions in the Katrina group 

and other small institutions (see Charts 1 and 2). For 

instance, the Katrina group is less exposed to real estate 

loans than other small institutions — residential and 

commercial real estate loans compose less than twothirds of all loans in the Katrina group, as opposed to 

more than three-quarters of all loans at small institutions nationwide. This difference is attributable to the 

lower relative level of commercial real estate loans at 

Katrina institutions. Another difference is that commercial and industrial loans and nonmortgage loans to 

consumers are relatively more prominent in the loan 

portfolios of Katrina institutions than in the portfolios 

of small institutions in general. It is likely that weaknesses in commercial loans will take longer to fully 

emerge than weaknesses in residential mortgages and 

other loans to individuals. 

The area devastated by Hurricane Katrina encompasses 

a wide variety of markets; because of that market diversity, many different outcomes among FDIC-insured 

institutions are to be expected. It will take many 

months, if not years, before the full impact on banks 

and thrifts becomes clear. 

Ross Waldrop, Senior Banking Analyst 

Chart 1 

Loan Portfolio of FDIC-Insured Institutions Affected 

by Hurricane Katrina 

(pre-hurricane, as of June 30, 2005) 

All Other Agricultural 4% 1% 

Residential Real Estate Consumer 33% 14% 

Commercial and
 

Industrial
 

18%
 

Commercial Real Estate 

32% 

Note: Percentages do not equal 100 percent due to rounding.
 

Sources: Federal Deposit Insurance Corporation (FDIC) Quarterly Reports of Condition
 

and Thrift Financial Reports.
 

Chart 2 

Loan Portfolio of All FDIC-Insured Institutions with
 

Less Than $1 Billion in Assets
 

(as of June 30, 2005) 

Agricultural All Other 

3% 1% Consumer
 

7%
 

Residential Real Estate Commercial and 

Industrial
 31%

14%
 

Commercial Real Estate
 

44%
 

Sources: Federal Deposit Insurance Corporation (FDIC) Quarterly Reports of Condition 

and Thrift Financial Reports. 

Update: As of November 25, 2005, third quarter 

2005 financial reports were available for 118 of the 

120 FDIC-insured institutions headquartered in the 

initial Katrina disaster area. These reports showed 

an increase in aggregate loan loss provisioning and 

higher net loan losses, as well as strong growth in 

assets and deposits during the third quarter. More 

than half of the group (69 institutions, or 58 

percent) reported lower earnings than in the second 

quarter. Twelve institutions reported net losses for 

the quarter, compared to six in the second quarter. 

Only 48 institutions (41 percent) reported higher 

loan loss provisions, while 46 reported higher net 

loan losses. Total assets and total deposits of the 

group increased by $3.1 billion (5.1 percent) and 

$2.9 billion (6.2 percent), respectively. 2 Noncurrent loans are those that are 90 days or more past due or in 

nonaccrual status. 

FDIC OUTLOOK 11 WINTER 2005 
Unique Challenges Face FDIC-Insured Institutions
 

after Katrina 

During the last days of August and the first days of 

September 2005, the nation and the world were 

shocked to realize the magnitude of the destruction 

wrought by Hurricane Katrina. In those early hours and 

days, the humanitarian crisis facing Gulf Coast residents took center stage while the realization grew that 

the region’s recovery would be a long and complex 

process. From the earliest stages of the crisis, bankers 

and their regulators were in motion behind the scenes 

to meet another set of logistical and financial challenges facing the financial services providers of the 

region. Like other sectors, the region’s banking industry 

was hit hard by the storm and will be dealing with the 

aftereffects for some time to come. This article discusses 

some of the short- and long-term challenges facing 

banks and thrift institutions affected by Katrina and 

describes some of the measures undertaken by bankers 

and regulators to maintain the availability of vital 

banking services in the Gulf Coast region. 

The landfall of Katrina during the early hours of 

August 29 created a broad swath of destruction across 

southern Louisiana, Mississippi, and Alabama. The 

number of customers without electrical power immediately after the storm has been estimated at around 2.7 

million. While service was restored to about 80 percent 

of these customers within three weeks, it may take up 

to six months to restore power to all of the eastern 

New Orleans area.1 The loss of electrical power and 

the pre-storm evacuation of many coastal areas would 

have been enough to cause several days of disruption 

in the operations of local financial institutions even if 

the recovery from the storm had proceeded smoothly. 

However, it quickly became clear that this would not 

be the typical hurricane recovery scenario. Communities all along the Mississippi Gulf Coast had been essentially flattened by the storm. Moreover, the breaching 

of the levees in New Orleans and the storm surge 

along the Gulf Coast led to unprecedented flooding, 

which forced the prolonged displacement of as many 

as 1 million people. 

1 Leslie Williams, “6 Months for Power, Nagin Says,” Times-Picayune, 

November 8, 2005. 

Like other sectors, the region’s 

banking industry was hit hard 

by the storm and will be dealing 

with the aftereffects for some 

time to come. 

These conditions contributed not only to what will be 

a long and complex recovery process for the region but 

also to significant short- and long-term difficulties for 

local financial institutions. In the sections that follow, 

we discuss both the short-term operational challenges 

facing local financial institutions and the longer-term 

issues related to credit quality and franchise value. 

Banks Faced Immediate Operational Challenges 

One of the Federal Deposit Insurance Corporation’s 

(FDIC) first priorities at the outset of the crisis was to 

initiate contact with a list of 280 potentially affected 

institutions to ascertain their operational status.2 

Despite the ongoing evacuations and the near-total 

disruption to communications in the region, FDIC 

supervisors, working with other federal and state banking regulators, were able to contact personnel from 260 

of the institutions by September 3, four days after 

Katrina made landfall. Of those 260 institutions, some 

70 (27 percent) were reporting that their operations 

had been partially or totally disrupted by the storm or 

the subsequent flooding. The remaining 20 institutions 

on the initial list were successfully contacted by 

September 7. As of December 9, some 100 institutions 

continued to report offices affected by Katrina, with 

98 branches still closed.3 

2 See “Financial Characteristics of Banks Affected by Katrina” by
 

Ross Waldrop in this issue for a detailed description of institutions
 

located within the Katrina disaster zone.
 

3 For the most recent information on the number of financial institutions affected by the hurricanes, visit the FDIC Web site at www.fdic.
 

gov/hurricane/index.html. 


FDIC OUTLOOK 12 WINTER 2005 
Unique Challenges Face FDIC-Insured Institutions after Katrina 

The immediate operational difficulties reported by 

these institutions tended to fall into two main categories: (1) the inability to operate branch offices and 

automated teller machines (ATMs) and (2) difficulty 

in processing electronic transactions. Of these two 

problems, restoring branch offices and ATMs proved to 

be the most vexing. By one estimate, more than 1,000 

ATMs were damaged or destroyed during the storm 

and the subsequent flooding.4 Many branch and ATM 

facilities located in New Orleans were underwater for 

up to a month, and some were inoperable for more 

than two months after the flooding. Where paper 

checks stored in bank offices or ATMs were destroyed, 

banks have had to use alternative means to process 

those items.5 Contaminated cash and coins have had 

to be shipped to the Federal Reserve Banks of Atlanta 

and Dallas for replacement. In other cases, especially 

those along the Mississippi Gulf Coast, bank office 

facilities were nearly or completely destroyed. Even 

where the physical locations had been accessible, institutions faced staffing problems due to the displacement 

of key personnel from their homes. 

Despite the scale of the destruction, there were few, if 

any, institutions that lost every single office because of 

Katrina. Many banks have resumed operations using 

facilities that were not severely damaged and have 

found creative ways to provide services to areas where 

facilities were heavily damaged. As of December 9, 

some 46 temporary banking locations were operating in 

Louisiana, Mississippi, Texas, and Alabama. In several 

other cases, a number of institutions have been sharing 

existing facilities to minimize disruption to customers 

in their local areas.6 Although regulators typically 

require institutions to file applications before moving 

branch locations or establishing new branches, these 

requirements have been temporarily waived in order to 

assist the recovery effort. It will likely take months to 

recover and rebuild bank properties damaged by the 

hurricane and the subsequent flooding. In the meantime, every institution in the region has found some 

4 “Katrina Hit Hard, but Payments Pros Hit Back,” Electronic 

Payments Week 2, no. 35, September 13, 2005. 5 Items that had been filmed prior to contamination are being 

processed under the Check 21 Act, and destroyed checks can be 

created and collected using the Automated Clearing House system 

under the Destroyed Check Entry format. However, checks rendered 

illegible by the flooding must be reissued by the payer. See: www. 

frbservices.org/FedFlash/2005/100105/FedFlash100105_sup.pdf. 

6 For example, see: FDIC, “Banks Opening More Branches in Areas 

Affected by Hurricane Katrina, Helping Communities Rebuild,” news 

release, September 14, 2005, www.fdic.gov/news/news/press/2005/ 

pr9005.html. 

way to reestablish a physical presence that allows it to 

interact with its customers. 

By contrast, although the effects on electronic payment 

systems were initially severe, they also proved to be 

relatively short-lived. In the immediate aftermath of 

the storm, the closing of bank offices and the interruption of electrical and telecommunications services 

effectively prevented many institutions from accepting 

or sending electronic transactions. The disruptions 

affected the ability to conduct both customer transactions through electronic funds transfer systems and 

wholesale funds transfers through Automated Clearing 

House (ACH) systems. 

Every institution in the 

region has found some way 

to reestablish a physical 

presence that allows it to 

interact with its customers. 

Data backup and disaster recovery plans — strengthened because of the challenges of Y2K and September 

11 — provided the means for most institutions to 

quickly resume accepting and sending electronic transactions within the first two weeks after Katrina. In the 

case of ACH transactions, bankers and Federal Reserve 

officials worked to establish alternative lines of communication that allowed institutions to conduct wholesale 

settlements. For the electronic networks that connect 

the region’s ATM machines, transactions had to be 

conducted in some cases on a “stand-in” basis, whereby 

cardholders could access their accounts immediately 

and verifications were made after the fact. 

The speed with which electronic transactions were 

restored in the region is testament to the effective 

disaster preparedness procedures that were put in 

place well before Katrina struck. Properly designed 

electronic recordkeeping and transactions processes 

have been invaluable in restoring financial services 

quickly to the devastated Gulf Coast communities. 

Many damaged or destroyed brick-and-mortar facilities, in contrast, are still unusable and may take many 

more months to repair. 

FDIC OUTLOOK 13 WINTER 2005 
In Focus This Quarter: A Preliminary Assessment of Recent Hurricane Effects 

Atypical Patterns of Financial Transactions 

In addition to the complications of simply reopening 

their doors to business, some banks located in the path 

of Katrina have experienced unusual transactional 

demands from their customers. In many cases, those 

who needed to buy emergency supplies or make temporary repairs to their homes spent significantly more in 

the weeks immediately following the storm than they 

otherwise would have. To the extent that electrical 

and communications outages limited their ability to 

use credit and debit cards at the point of sale, many 

of these customers also demanded higher-than-usual 

amounts of cash with which to conduct their business. 

These liquidity demands also extended to bank 

customers who were displaced to other parts of the 

country or experienced interruptions to their normal 

sources of income. 

Since the earliest stages of the crisis, bankers and 

regulators have worked to ensure that institutions had 

sufficient access to cash and the utmost flexibility to 

manage their balance sheets and meet the transactional 

needs of their customers. During the first week of the 

crisis, the Federal Reserve Bank of Atlanta instituted 

extended hours for discount window lending and made 

special deliveries of cash to meet demand. Also from 

the start, the FDIC and other regulators encouraged 

bankers to undertake measures to minimize impediments for customers trying to access their funds. These 

measures included: 

•	 Waiving ATM fees and surcharges, 

•	 Increasing daily ATM cash withdrawal limits, 

•	 Easing restrictions on check-cashing for customers 

and non-customers, 

•	 Waiving overdraft fees as a result of paycheck 

interruption, and 

•	 Waiving late fees due to late payments caused by 

interrupted mail service. 

Bankers have been highly successful in facilitating 

transactions for the vast majority of their customers 

during the crucial early stages of the recovery process. 

Still, bank customers will no doubt continue to experience inconveniences due to branch closings and 

damaged ATMs. 

Maintaining cash for customer needs remains a top 

priority for these institutions, but over time they may 

actually face challenges related to excess liquidity. As 

insurance proceeds and other forms of disaster assistance flow into the region, customers can be expected 

to accumulate large balances at their banks until 

those funds can be put to use in the rebuilding effort. 

During this stage of the recovery, banks could accumulate more deposits than they would under normal 

conditions. Such an inflow of funds could cause these 

institutions to grow their balance sheets faster than 

usual, forcing them to make some important strategic 

decisions with regard to how they manage their asset 

portfolios. All things being equal, this balance sheet 

growth could also have the effect of lowering capital 

and reserve ratios. Although these developments are 

expected to be manageable, they are indicative of the 

unusual fluctuations in transactional demand that 

Gulf Coast financial institutions will experience 

during the recovery period. 

Credit Quality Represents a Long-Term Concern 

From a financial standpoint, the biggest source of 

uncertainty and concern for Gulf Coast financial 

institutions is the effect of the post-hurricane damage 

on credit quality. As described in an accompanying 

article in this issue, local institutions — like the 

industry as a whole — have recently had some of the 

lowest rates of problem loans on record.7 However, 

the massive economic dislocations caused by Katrina 

will expose many local institutions to higher levels 

of credit losses going forward. 

From a financial standpoint, 

the biggest source of uncertainty 

and concern for Gulf Coast 

financial institutions is the 

effect of the post-hurricane 

damage on credit quality. 

7 See “Financial Characteristics of Banks Affected by Katrina” in this 

issue. 

FDIC OUTLOOK 14	 WINTER 2005 
Unique Challenges Face FDIC-Insured Institutions after Katrina 

The economic toll of the storm is unprecedented in 

U.S. history. Revised estimates by the Red Cross 

show that around 210,000 homes have been 

destroyed or seriously damaged in Louisiana, 

compared to 28,000 homes destroyed by Hurricane 

Andrew in 1992.8 In the immediate vicinity of New 

Orleans, it is estimated that 50,000 homes will need 

to be demolished, while 500,000 automobiles were 

flooded and 50,000 boats were displaced from their 

moorings.9 The Congressional Budget Office estimated that between 280,000 and 400,000 jobs were 

lost initially as a result of the storm, although many 

displaced workers are finding employment in other 

areas of the country.10 Risk Management Solutions 

(RMS) of Newark, California, estimated that the 

total economic losses related to the storm will 

exceed $125 billion, at least 50 percent of which 

are attributable to the New Orleans flood. 

As estimates of Katrina-related losses have risen over 

time, so have estimates of financial assistance that will 

be forthcoming to help offset those losses. The assistance will come from local, state, and federal governments, insurers, private charities, and other sources. 

RMS estimates that the cost to insurers is likely to 

range between $40 billion and $60 billion, of which 

some $15 billion to $25 billion will be incurred as a 

result of the flooding in New Orleans. Although standard policies purchased by homeowners and businesses 

exclude flood damage, policies purchased under the 

National Flood Insurance Program will cover these 

losses up to certain limits. Flood insurance policies are 

generally required on mortgaged properties located 

within flood plain areas designated by the Federal 

Emergency Management Agency (FEMA), although 

it is likely that the extent of the flooding in both 

Mississippi and Louisiana went well beyond those 

flood plain areas. Preliminary estimates of the percentage of residential and commercial properties covered 

by federal flood insurance range from 30 to 60 percent 

in affected regions of Louisiana to only about 10 

percent in Mississippi.11 However, based on the legal 

actions that have already been brought with regard to 

8 Red Cross Disaster Assessment in Louisiana, October 6, 2005.
 9 Ceci Connolly, “A Rude Return to ‘Big Easy’: City Warns Residents
 

of Possible Hazards,” Washington Post, September 17, 2005.
 10 Douglas Holtz-Eakin, Congressional Budget Office Director,
 

testimony before the Committee on the Budget, U.S. House of
 

Representatives, October 6, 2005, www.cbo.gov/showdoc.
 

cfm?index=6684&sequence=0.
 

11 “Hurricane Katrina Could End Up as Biggest Insured Loss Ever,”
 

National Underwriter, September 5, 2005.
 

insurance coverage, it may ultimately be up to the 

courts to resolve the issue of exactly how much 

damage will be covered by standard homeowners 

and business insurance policies.12 

The total amount of federal 

assistance could ultimately 

exceed $100 billion. 

Billions of dollars in federal disaster assistance have 

also begun flowing to the region. By September 12, 

two emergency supplemental bills had been enacted 

that will ultimately provide some $62.3 billion in 

federal assistance. In a prime-time speech delivered on 

September 15, President Bush called for a range of 

federal assistance to households and businesses and the 

rebuilding of devastated areas. The proposal calls for 

“worker recovery accounts” of up to $5,000 per person 

and the creation of a Gulf Opportunity Zone that 

would provide assistance to local businesses as they 

rebuild. On November 1, the president named FDIC 

Chairman Donald E. Powell as coordinator of the 

federal rebuilding effort in the Gulf Coast region. 

While federal aid is already flowing through several 

channels, it will take time to fully disburse the funds. 

The Congressional Budget Office estimated that by the 

end of fiscal 2006, FEMA will spend approximately $30 

billion, or around half of the total funds that have been 

approved for its use. By December 7, more than 1.7 

million persons had registered for FEMA assistance, 

some $4.2 billion in direct assistance had been paid to 

Katrina victims, and another $8.3 billion had been paid 

out to policyholders under the National Flood Insurance Program.13 Meanwhile, the U.S. Department of 

Labor is operating three programs to offer immediate 

income assistance to workers displaced by Hurricane 

Katrina, including standard unemployment insurance, 

disaster unemployment insurance for those not eligible 

for the standard program, and the provision of temporary jobs funded through National Emergency Grants. 

12 Risk Management Solutions, “Hurricane Katrina: Profile of a
 

Super Cat,” October 2005, www.rms.com/Publications/
 

KatrinaReport_LessonsandImplications.pdf.
 

13 FEMA, “By the Numbers: First 100 Days — FEMA Recovery
 

Update for Hurricane Katrina,” news release, December 6, 2005,
 

www.fema.gov/news/newsrelease.fema?id=21078.
 

FDIC OUTLOOK 15 WINTER 2005 
In Focus This Quarter: A Preliminary Assessment of Recent Hurricane Effects 

Since September, Congress has passed seven additional 

measures that address issues ranging from student loan 

repayments to supplemental unemployment and health 

care benefits, bringing total approved federal assistance 

up to almost $71 billion. With several other bills 

pending, the total amount of federal assistance could 

ultimately exceed $100 billion.14 

Given the offsetting forces of massive economic losses 

and the large-scale inflows of insurance proceeds and 

federal aid, a few preliminary conclusions can be 

reached about credit losses at FDIC-insured institutions. First, there will be upward pressure on credit 

losses from recent historically low levels of problem 

loans. This pressure will be the greatest on smaller 

institutions that conduct business mostly or exclusively 

located in the hardest-hit areas. Second, the vast 

amounts of financial assistance flowing to the region 

will eventually go a long way toward mitigating the 

anticipated credit losses in affected institutions’ portfolios of mortgage loans, consumer loans, and commercial 

loans. Third, it will take some time, perhaps several 

months, to ascertain the full extent of the damage to 

individual borrowers as well as the assistance that will 

be available to them. 

An important long-run 

consideration for banks in the 

Gulf Coast region is the impact 

Katrina will have on their 

long-term earnings capacity, 

or their franchise value. 

In light of the foregoing conditions, regulators and 

lenders have embraced a policy of flexibility toward 

borrowers in the early stages of the crisis. As has been 

the case in previous natural disasters, the FDIC and 

other banking regulators moved quickly at the outset to 

encourage institutions to work with borrowers to help 

them overcome hardships as the region gets back on its 

14 For example, Louisiana Representative Richard H. Baker has 

introduced legislation (called “The Baker Bill”) to create a Louisiana 

Recovery Corporation that would channel federal assistance to property owners and promote residential redevelopment in the state. 

feet. For example, an FDIC Financial Institution Letter 

(FIL) released on August 29, 2005, advised institutions 

to consider a range of policies to assist borrowers 

temporarily affected by the storm: 

The FDIC is encouraging banks to work constructively 

with borrowers who, because of the natural disaster, are 

experiencing difficulties beyond their control. Extending 

repayment terms, restructuring existing loans or easing 

terms for new loans, if done in a manner consistent with 

sound banking practices, can contribute to the health of 

the community and serve the long-term interests of the 

lending institution.15 

Because of the prolonged nature of the recovery process 

and the uncertain timing of insurance and disasterrelief payments, the federal banking agencies issued 

further regulatory guidance on November 30 encouraging lenders to continue to work with borrowers affected 

by Katrina.16 While acknowledging that individual 

deferral programs and workout arrangements would 

vary across institutions, the November 30 guidance 

advocates providing flexible payment terms at the end 

of the deferral period so that all deferred interest and 

principal do not become due immediately when 

payments resume. 

These flexibilities are intended to avoid creating 

unnecessary financial hardships on borrowers whose 

long-term prospects remain good, but who will experience significant difficulties in the near term. To put 

it another way, given the severity and suddenness of 

the economic hardships associated with Katrina, a 

policy of flexibility can ensure that lenders minimize 

the hardships on borrowers in the short run and maximize the ability of borrowers to repay over the long 

run. As disaster assistance continues to flow into the 

region, banks and their borrowers will be striving to 

return to a more normal footing where borrowers 

meet monthly debt obligations and banks effectively 

manage problem loans. 

15 FDIC, “Regulatory Relief: Steps to Help Rebuild Areas Affected by
 

Hurricane Katrina,” FIL-85-2005, August 29, 2005, www.fdic.gov/
 

news/news/financial/2005/fil8505.html.
 

16 The November 30 guidance issued by the Federal Financial Institutions Examination Council (FFIEC) can be found at: www.ffiec.gov/
 

press/pr113005.htm.
 

FDIC OUTLOOK 16 WINTER 2005 
Unique Challenges Face FDIC-Insured Institutions after Katrina 

Effects on Long-Term Franchise Value Remain 

Uncertain 

Another important long-run consideration for banks in 

the Gulf Coast region is the impact Katrina will have 

on their long-term earnings capacity, or their franchise 

value. In general, the franchise value of local financial 

institutions is determined by a number of factors that 

are closely connected to the economic vitality of a 

region. These factors include the amount of savings 

generated in the region, loan demand generated by 

local households and businesses, and the propensity of 

the region to experience swings in economic activity 

that could adversely affect credit quality. 

If there were any initial 

expectations that the recovery 

from Hurricane Katrina would 

be straightforward or proceed 

quickly, the developments of the 

first 100 days proved otherwise. 

The long-run franchise value of financial institutions 

located in the path of previous natural disasters has 

generally been unaffected. In fact, the inflow of disaster 

assistance and the large-scale rebuilding effort that typically follow a destructive storm can usually be expected 

to generate demand for financial institutions to manage 

funds and finance rebuilding activities.17 However, the 

massive dislocations associated with Hurricane Katrina 

introduce a measure of uncertainty into the long-run 

picture, at least for some local communities. It is 

evident that given the enormous economic importance 

of the Gulf Coast region to the U.S. economy and the 

commitment of federal, state, and local officials, the 

Gulf Coast economy will undergo a strong recovery. At 

the same time, at the local level it remains difficult to 

know which areas can be rebuilt and which areas may 

face overwhelming obstacles (such as environmental 

contamination) that may make it preferable to rebuild 

17 See “Bank Performance after Natural Disasters: A Historical 

Perspective” by Kristy Frame, Lynne Montgomery, and Christopher 

Newbury in this issue for a review of recent U.S. natural disasters 

and the effects on FDIC-insured institutions. 

elsewhere. In addition, the effect of insurance payments 

and federal disaster payments on the local economies of 

the Gulf Coast will be determined to some degree by 

whether evacuees decide to return to the region. To the 

extent that evacuees choose to permanently relocate 

outside the region, this financial assistance may not 

provide a significant stimulus to these local 

economies.18 

A Long Road Ahead 

If there were any initial expectations that the recovery from Hurricane Katrina would be straightforward 

or proceed quickly, the developments of the first 100 

days proved otherwise. Even as the floodwaters 

receded and the cleanup began, it became clear that 

there were serious environmental concerns — 

including the need to deal with mold and hazardous 

chemicals — that will need to be addressed before 

significant rebuilding can take place. Another pressing 

issue will be the need to ensure that necessary repairs 

and improvements are made to the protective levees 

that surround New Orleans. Even with the availability 

of billions of dollars in financial assistance, it could 

take years to fully repair the damage that has been 

done to businesses, residential neighborhoods, and 

public facilities in the most severely affected areas. In 

the meantime, a critical shortage of housing is making 

it difficult to bring back the workers needed to begin 

the rebuilding process. The realization of these difficulties could itself be a deterrent to the return of 

evacuees from New Orleans, many of whom may 

choose to permanently relocate outside the region. 

Some progress is being made in resolving these uncertainties, which should prepare the way for future redevelopment. On December 15, the Administration 

pledged an additional $1.5 billion to strengthen the 

levees surrounding New Orleans and to build “the 

best levee system known in the world,” according to 

the federal coordinator, Donald Powell.19 Additional 

incentives for local business investment are expected 

to be contained in federal assistance programs 

18 New Orleans Mayor Ray Nagin recently estimated that the city
 

could stand to regain only half of its pre-Katrina population. See:
 

Manuel Roig-Franzia and Ceci Connolly, “Night and Day in New
 

Orleans,” Washington Post, November 29, 2005.
 19 Joby Warrick and Peter Baker, “Bush Pledges $1.5 Billion for New
 

Orleans; Proposal Would Double Aid from U.S. for Flood Protection,”
 

Washington Post, December 16, 2005.
 

FDIC OUTLOOK 17 WINTER 2005 
In Focus This Quarter: A Preliminary Assessment of Recent Hurricane Effects 

currently under development. For example, the 

proposed Gulf Opportunity Zone would provide for 

tax relief and loans amounting to some $2.3 billion 

over the next five years for businesses and entrepreneurs that invest in hard-hit local economies in 

Louisiana, Mississippi, and Alabama. An essential 

element in this process will be the resilience and 

perseverance of local financial institutions. As the 

Gulf Coast economy becomes revitalized, it will take 

a sustained effort of these local institutions and their 

regulators to help ensure that recovery funds are 

managed efficiently and invested wisely. 

Richard A. Brown, Chief Economist 

FDIC OUTLOOK 18 WINTER 2005 
Hurricane Damage to Oil and Gas Infrastructure 

Translates into Higher and More Volatile 

Energy Prices 

Within just 27 days in 2005, two major hurricanes, 

Katrina and Rita, struck the Gulf Coast of the United 

States, leaving significant destruction in their wake. As 

gasoline prices soared above $3 per gallon, Americans 

were reminded of the importance of Gulf of Mexico 

ports to the U.S. energy sector and our economy. In 

fact, the Gulf Coast region provides more than 47 

percent of the nation’s oil refining capacity, about 29 

percent of the country’s oil production, and 20 percent 

of its natural gas output. 

Energy Prices Were Already Rising before the 

Hurricanes 

Strong global demand had been pushing energy prices 

higher even before the supply shock caused by Hurricanes Katrina and Rita. For example, the price of west 

Texas intermediate oil, or WTI, had reached nearly 

$60 per barrel in July 2005, up from $50 in May and 

$43 in December 2004. Natural gas prices also were 

on the rise when the hurricanes struck due to strong 

overall demand and the effects of industrial customers 

switching to natural gas power as oil prices surged. The 

prices of refined oil products were pressured by both 

the demand and supply sides, as refineries operated 

with little excess capacity. In January 2005, the price of 

regular gasoline averaged $1.83 per gallon, but by July 

it had risen to $2.29 per gallon. The nation’s energy 

sector had little slack to cushion the supply impact of 

the storms in the Gulf this summer and fall. 

The Physical Gulf Coast Energy Infrastructure Was 

Badly Damaged by Katrina and Rita 

The physical infrastructure exposed to major storms in 

the Gulf included offshore oil and gas production and 

drilling rigs and platforms, an extensive network of 

pipelines, oil refineries, and the Louisiana Offshore Oil 

Port, which handles almost 11 percent of the nation’s 

oil imports. Much of the infrastructure sustained at 

least some damage from the hurricanes. 

Oil and Natural Gas Production. Nearly all Gulf of 

Mexico (GOM) oil and natural gas production was 

shut down as a safety precaution when Hurricane 

Katrina approached the Gulf Coast. Production can 

generally be brought back online after the equipment 

is inspected and deemed safe for normal operation. 

Because of damaged platforms, pipelines, and refineries, 

however, more than half of GOM oil production and 

35 percent of GOM gas production remained “shut in” 

three weeks after Katrina’s landfall.1 On September 23, 

with Hurricane Rita threatening, the industry again 

shut in about 99 percent of GOM oil production and 

about 72 percent of its gas production. As of November 

10, seven weeks after Rita, about half of GOM oil and 

more than 40 percent of GOM gas was still shut in (see 

Chart 1). As recently as December 5, about a third of 

the Gulf’s oil production and 27 percent of the region’s 

natural gas output remained shut in. The elevated shutin figures are due to damage to both the region’s 

offshore infrastructure and its onshore gas processing 

plants, refineries, and pipelines. 

Oil and Gas Platforms and Rigs. There were 1,300 oil 

and gas platforms in the path of Hurricane Katrina and 

about 1,600 platforms in the path of Rita. Of those, 

Katrina destroyed 46 and seriously damaged 20, while 

Rita destroyed 66 and seriously damaged 32 (see Chart 

2). According to Department of the Interior Secretary 

Gale Norton, “108 of the older ‘end of life’ facilities not 

built to Minerals Management Service’s upgraded 

design standards were destroyed. They account for only 

1.7 percent of the Gulf’s oil production and 0.9 percent 

of the Gulf’s gas production.”2 A much smaller number 

of drilling rigs were damaged or destroyed by these 

storms. The cumulative shut-in oil production for the 

period of August 26, 2005, to December 2, 2005, was 

equivalent to 17.7 percent of the yearly production of 

oil in the GOM. The comparable figure for natural gas 

production is 13.7 percent. 

1 Oil and gas wells and mines that are “shut in” are capable of
 

production but temporarily closed for repair, cleaning, or inaccessibility to a market.
 

2 U.S. Department of the Interior, “Interior Secretary Gale Norton
 

Reports on Gulf of Mexico Energy Status,” news release, October 4,
 

2005, www.mrm.mms.gov/Intro/PDFDocs/20051004.pdf.
 

FDIC OUTLOOK 19 WINTER 2005 
1851-1860

1861-1870

1871-1880

1881-1890

1891-1900

1901-1910

1911-1920

1921-1930

1931-1940

1941-1950

1951-1960

1961-1970

1971-1980

1981-1990

1991-2000

2001-2010 F 

In Focus This Quarter: A Preliminary Assessment of Recent Hurricane Effects 

Chart 1 Chart 2 

A Third of the Oil and 27 Percent of the Natural Gas 

Produced in the Gulf Was Still “Shut In” Ten Weeks 

after Hurricane Rita 

Note: Wells that are “shut in” are capable of production but temporarily closed for repair, 

cleaning, or inaccessibility to a market. 

Source: Minerals Management Service. 

Percent of Daily Production Shut In 

0 

10 

20 

30 

40 

50 

60 

70 

80 

90 

100 

Percent of oil shut in 

Percent of gas shut in 

Aug 30 Sept 7 Sept 15 Sept 24 Oct 3 Oct 13 Oct 25 Nov 3 Nov 18 Dec 2 

Chart 3 

Oil and Gas Infrastructure Suffered Significant Damage 

from Hurricanes Katrina and Rita 

Number of Platforms or Rigs Destroyed or Extensively Damaged 

120 

100 

80 

60 

40 

20 

0 

98 

Platforms 

Rigs 

14 

Platforms in the path: 

Rita—1,600 

Katrina—1,300 

66 

13 

Rita (9/05) Katrina (8/05) 

Source: Office of Electricity Delivery and Energy Reliability, U.S. Dept. of Energy, Gulf 

Coast Hurricanes Situation Report #17, October 17, 2005. 

Chart 4 

Nearly 30 Percent of U.S. Refining Capacity Was Shut
 

Down Due to Damage or Loss of Power after Hurricane
 

Rita Struck the Gulf Coast
 

Percent of U.S. Refining Capacity Shut Down in the Gulf of Mexico 

as a Result of Hurricanes (2005) 

35% 

30% 28.7%

25% 

20% 17.8% 

15% 11.2% 9.6% 10% 

5.2% 5.8% 4.7% 5% 

0% 

Sept 1 Sept 16 Sept 23 Sept 30 Oct 14 Oct 25 Oct 31 

Source: Office of Electricity Delivery and Energy Reliability, U.S. Dept. of Energy. 

Four of the Five Largest U.S. Ports Were in the Path 

of Hurricanes Katrina and Rita 

Note: Huntington, WV, refers to the Huntington-Tristate port, which includes portions of 

the Ohio, Kanawha, and Big Sandy rivers. 

Source: American Association of Port Authorities. 

2003 Cargo Volume for Top Ten U.S. Ports (million short tons) 

The Port of New Orleans 

was operating at 50 

percent of capacity on

November 28, 2005, 13 

weeks after Katrina’s 

landfall. 

Baton Rouge, LA 

Texas City, TX 

Long Beach, CA 

Corpus Christi, TX 

Huntington, WV 

New Orleans, LA 

Beaumont, TX 

New York, NY, and NJ 

Houston, TX 

South Louisiana, LA 

0 50 100 150 200 250 

Chart 5 Chart 6 

Elevated Energy Prices Are Expected 

at Least through 2006 

Crude Oil Price 

(WTI, dollars/barrel) 

Natural Gas Price 

(Henry Hub Spot, dollars/mcf) 

Notes: WTI = West Texas Intermediate oil; mcf = thousand cubic feet. 

Source: Energy Information Administration, Short-Term Outlook, December 2005. 

2004.1

2004.2

2004.3

2004.4

2005.1

2005.2

2005.3

2005.4

2006.1

2006.2

2006.3

2006.4 

0 

10 

20 

30 

40 

50 

60 

70 

0 

2 

4 

6 

8 

10 

12 

14 

Weather Conditions Indicate That the Atlantic May
 

Have Years of Increased Hurricane Activity
 

Number of hurricanes to strike the 

mainland U.S. each decade In the current decade, it is assumed

that the last five years of the decade is 30 half as active as the first five years. 

All Hurricanes 

25 

20 

Average = 17.7 per decade 

Average = 6 per decade 

Major Hurricanes (category 3, 4, or 5) 

15 

10 

5 

0 

Note: “F” indicates forecast data.
 

Source: National Hurricane Center, www.nhc.noaa.gov/pastdec.shtml.
 

FDIC OUTLOOK 20 WINTER 2005 
Hurricane Damage to Oil and Gas Infrastructure 

Refineries. A number of oil refineries were damaged 

by the hurricanes. Refineries sustained wind damage, 

flooding, and loss of power. After Katrina, more than 

11 percent of U.S. refining capacity was shut down as 

a result of the hurricane, which sent the price of gasoline and other refined products soaring. By September 

16, several refineries were brought back online, reducing the capacity shut down to about 5 percent. 

However, Hurricane Rita had the potential for striking 

the Houston/Galveston area, where a number of 

important oil refineries are located; as the region 

braced for a major storm, the threat of Rita shut down 

nearly 30 percent of the nation’s refining capacity (see 

Chart 3). More than a month after Rita’s landfall, 

nearly 5 percent of the country’s oil refining capacity 

was still offline. 

Port of New Orleans. Wharfs, cranes, and terminals of 

the Port of New Orleans, the fifth-largest port in the 

United States, sustained extensive damage, which was 

estimated at $1.6 billion from Hurricane Katrina (see 

Chart 4). Although operating at just 50 percent capacity during the week of November 28, the Port of New 

Orleans estimates that it will be operating at 80 to 100 

percent of capacity by March 2006. 

Energy Prices. The prices of refined oil products 

responded so dramatically to the effects of the hurricanes because of the lack of excess capacity at the 

nation’s refineries. Data provided by the Energy Information Administration indicate that on August 30, 

the day after Katrina’s landfall, the price of reformulated regular gasoline on the New York Mercantile 

Exchange jumped more than 20 percent. The price of 

oil (WTI) rose 3.9 percent, and the price of natural gas 

for October delivery increased 4.7 percent. Although 

most energy prices have retreated from the highs 

prompted by the hurricanes, they remain at historically 

high levels. 

Energy Prices Are Likely to Remain High 

High energy prices are likely to be with us at least 

through 2006 (see Chart 5). The Energy Information 

Administration’s December 6, 2005, Short-Term 

Energy Outlook forecasts oil prices (WTI) to be in the 

range of $60 to $64 per barrel through 2006. Natural 

gas prices are also expected to remain higher next year, 

though down from the peak experienced in fourth 

quarter 2005. 

A greater concern is the possibility that hurricane 

activity in the Gulf of Mexico is on the upswing. 

Experts indicate that a “confluence of optimal ocean 

and atmosphere conditions has been known to produce 

increased tropical storm activity in multi-decadal 

(20- to 30-year) cycles. Because of this, NOAA [the 

National Oceanic and Atmospheric Administration] 

expects a continuation of above-normal seasons for 

another decade or perhaps longer.”3 (See Chart 6.) 

If NOAA is correct, energy prices could remain high 

and volatile for years to come. If so, the economy will 

continue to find ways to adapt, but the adjustment 

process could be costly. Bankers and other business 

managers will need to incorporate the prospect of 

many more years of high and volatile energy prices 

into their plans. 

Stephen C. Gabriel, Senior Financial Economist 

3 National Oceanic and Atmospheric Administration, Department of 

Commerce, “NOAA Raises the 2005 Atlantic Hurricane Season Outlook,” 

NOAA Magazine, August 2, 2005, www.noaanews.noaa.gov/stories 

2005/s2484.htm. 

FDIC OUTLOOK 21 WINTER 2005 
The Effects of Katrina and Rita on the 

U.S. Economy and Consumers 

The loss of economic activity and elevated energy 

prices associated with Hurricanes Katrina and Rita 

created significant headwinds for the U.S. economy 

during the third quarter. Despite these sources of drag, 

the Bureau of Economic Analysis estimated that the 

U.S. economy grew at a 4.3 percent annual rate during 

the quarter (see Chart 1). This performance exceeded 

the expectations of many observers, including contributors to a post-Hurricane Katrina Blue Chip Economic 

Indicators forecast that called for growth of 3.4 

percent. The hurricanes had notable effects on aggregate economic activity during the third quarter, with 

the primary ripple effects being elevated energy prices 

coinciding with a decline in consumer confidence. 

However, the brunt of the impact was concentrated in 

the Gulf Coast region, which experienced declines in 

industrial output and considerable job losses.1 

U.S. labor market growth weakened noticeably during 

September and October, dragged down by job losses in 

the Gulf Coast region. During both months, nonfarm 

payrolls were essentially unchanged, but the unemployment rate remained relatively steady around 5 percent, 

near its lowest level since 2001. As of early December, 

the Bureau of Labor Statistics estimated that 562,000 

initial jobless claims had been filed as a result of Hurricanes Katrina and Rita (see Chart 2). These claims 

were concentrated primarily in Louisiana and Mississippi, and to a lesser extent in Alabama. However, 

nationwide initial claims have since fallen back to near 

pre-Katrina levels. Furthermore, the labor market 

rebounded in November with nonfarm payrolls expanding by 215,000, their largest gain in four months. 

During September, consumer confidence fell to its 

lowest level in two years and remained subdued during 

October before recovering slightly in November (see 

Chart 3). High energy prices, coupled with ongoing 

geopolitical concerns and uncertainties about the 

economic impact of the hurricanes, weighed on the 

consumer’s evaluation of both current and future conditions. For example, a CNN/USA Today/Gallup poll 

taken in mid-September (about two weeks after Hurricane Katrina’s landfall) indicated that four out of five 

Americans were concerned that Katrina would negatively impact their finances. A CBS/New York Times 

poll taken around the same time showed that 73 

percent expected their taxes to increase as a result of 

the storm. 

Real personal disposable incomes declined during 

August, driven mostly by a significant drop in business 

owners’ income resulting from Katrina. Total private 

industry wages also came under pressure but still 

managed to grow during August and September. One 

factor that helped support private industry wages was 

the decision of some companies with operations in the 

Gulf Coast region to either keep employees on their 

payrolls (even if they were unable to work) or to relocate them to undamaged worksites. 

Despite continued growth in incomes and the 

payments associated with federal disaster relief, 

inflation-adjusted U.S. consumer spending declined 

during both August and September (see Chart 4).2 

Much of this decline was attributable to a sharp 

drop in auto sales that began before Katrina, as well 

as a sluggish back-to-school shopping season (see 

Chart 5). While September’s dip in spending can be 

explained by the adverse effects of the hurricanes on 

employment and consumer confidence, more recent 

indicators point to a rebound in spending. Retailers 

reported that, nationwide, same-store sales increased 

4.4 percent in October and 3.5 percent in November, 

according to the International Council of Shopping 

Centers. Early holiday sales were modest, propped 

up by discounters like Wal-Mart that offered a 

series of price cuts for “Black Friday,” the day after 

Thanksgiving. As a result, retail analysts who were 

initially concerned that the holiday season could be 

much weaker than initially forecast, now expect 

that the discounts and price wars may help perk up 

holiday spending. 

2 Estimates of total insured losses from Hurricanes Katrina and Rita 

exceeded $60 billion. In addition, it was projected that the federal 1 Taken together, the states of Louisiana and Mississippi make up less government would provide between $150 billion and $200 billion in 

than 2 percent of total U.S. economic activity. assistance to hurricane victims. 

FDIC OUTLOOK 22 WINTER 2005 
The Effects of Katrina and Rita on the U.S. Economy and Consumers 

Chart 1 

Economic Growth Is Expected to Pick Up in Early 

2006 as Rebuilding Efforts in the Gulf Coast 

Region Get Under Way 

Gross Domestic Product 

Quarterly percent change, seasonally adjusted annual rate 

4.5 Forecast 

4.0 

3.5 

3.0 

1950–2004 Average Annual Growth Rate 

2.5 

2.0 

2004 2005 2006
 

Sources: Bureau of Economic Analysis; Blue Chip Economic Indicators.
 

Chart 3 

Consumer Confidence Fell in the Wake of Katrina
 

but Has Rebounded, as It Has after
 

Previous Disasters
 

Chart 2 

An Estimated 562,000 New Jobless Claims Were Filed

 as a Result of the Effects of the Hurricanes 

Weekly U.S. Initial Jobless Claims

Seasonally Adjusted 

450,000 Total Initial
 

Jobless Claims
 425,000 

400,000 

375,000 

350,000 

325,000 

2005 Average 

300,000 

August September October November 

Source: Bureau of Labor Statistics. 

Chart 4 

Government Assistance Helped Mitigate Losses in 

Personal Income from the Hurricanes 

Monthly Change (in billions of dollars) Conference Board University of Michigan

Consumer Confidence Consumer Sentiment 

Index, 1985 = 100 Index, Q1 66 = 100 

Hurricane 

Andrew 

September 11, 2001 

Hurricane 

Katrina 

140 

120 

100
 

80
 

60
 

40
 

1990 1993 1996 1999 2002 2005 

Sources: The Conference Board; University of Michigan. 

Chart 5 

140 

120 

100 

80 

60 

40 

Seasonally adjusted annual rate 

$300
 

Current transfer receipts*
 $200
 

$100
 

$0
 

-$100
 

-$200
 Personal income less 

current transfer receipts -$300 

Jul-05 Aug-05 Sep-05 Oct-05 

* Transfer receipts include payments such as property and casualty insurance, 

unemployment benefits, Social Security, and Medicare. 

Source: Bureau of Economic Analysis. 

Chart 6 

In August, Auto Sales Dropped after Incentives Expired 

but before the Hurricanes Hit; Retail Sales Continued 

to Grow despite the Storms 

Seasonally Adjusted Monthly Change

(in billions of dollars) 

$6 Retail sales less autos 

$4 

$2 

$0 

-$2 

-$4 

-$6 Auto sales 

-$8 

-$10 

Over the Past 25 Years Personal Bankruptcy Filings 

Have Surged in Areas Hit by Major Hurricanes, 

Especially Two and Three Years Afterward 

Source: Professor Robert Lawless, University of Nevada, Las Vegas. 

Average increase in personal bankruptcy

filing rate after a hurricane, 1980–2004 

Time after Hurricane 

0% 

10% 

20% 

30% 

40% 

50% 

1 Year 2 Years 3 Years 

Landfall state 

Other affected states 

Unaffected states 

Jul-05 Aug-05 Sep-05 Oct-05 

Source: U.S. Census Bureau. 

FDIC OUTLOOK 23 WINTER 2005 
In Focus This Quarter: A Preliminary Assessment of Recent Hurricane Effects 

As of early fall, nationwide measures of household loan 

performance remained relatively strong. However, 

Hurricane Katrina hit hardest in an area of the nation 

that historically has lagged the nation in terms of 

poverty rates and credit performance. Accordingly, 

many households in the region were somewhat vulnerable to financial shocks. For example, one-fifth of 

Louisianans were already living below the poverty line 

before Katrina. The average credit score in New 

Orleans was 633 during second quarter 2005 and the 

60-day delinquency rate was 5.4 percent.3 These figures 

compared with an average national credit score of 662 

and a delinquency rate of 4.2 percent. Given the relative financial weakness of many Gulf Coast households 

at the time of the hurricanes, any resulting consumer 

credit deterioration could be more pronounced than if 

the storms had hit a less vulnerable subset of the population. This risk may be mitigated to the extent that 

these borrowers tended to hold smaller average loan 

balances than borrowers in most other regions. 

Louisiana officials report that they are expecting an 

increase in the number of personal bankruptcies filed in 

the state.4 Historical research shows that over the past 

25 years, states where major hurricanes made landfall 

have seen bankruptcy filings subsequently increase 50 

percent faster than filings in states not affected by the 

storms (see Chart 6). The largest deterioration is typically seen two to three years after the hurricanes hit, 

suggesting that Louisiana and Mississippi may continue 

to experience increased credit quality problems during 

the next few years. 

Susan Burhouse, Financial Economist 

Nathan H. Powell, Financial Economist 

3 TransUnion LLC. TransUnion’s credit score is the TransRisk score, 

derived from TransUnion’s Trend Database. All data received were 

depersonalized and aggregated from consumer credit reports. 

4 Associated Press, “Expected Surge in Katrina-Related Bankruptcies 

May Come Too Late for Some,” WTNH.com, October 5, 2005, 

www.wtnh.com/Global/story.asp?S=3941308. 

FDIC OUTLOOK 24 WINTER 2005 
FDIC Outlook is published quarterly by the Division of Insurance and Research of the Federal Deposit 

Insurance Corporation as an information source on banking and economic issues for insured financial 

institutions and financial institution regulators. 

FDIC Outlook provides an overview of economic and banking risks and discusses how these risks relate to 

insured institutions nationally and in each FDIC region. 

Single-copy subscriptions of FDIC Outlook can be obtained by sending the subscription form found on the 

back cover to the FDIC Public Information Center. 

FDIC Outlook is available online by visiting the FDIC’s Web site at www.fdic.gov. For more information or to 

provide comments or suggestions about FDIC Outlook, please call Barbara A. Ryan at 202-898-3841 or send 

an e-mail to baryan@fdic.gov. 

The views expressed in FDIC 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 

of this publication was obtained from publicly available sources that are considered reliable. However, the 

use of this information does not constitute an endorsement of its accuracy by the Federal Deposit Insurance 

Corporation. 

Acting Chairman Martin J. Gruenberg 

Director, Division of Insurance 

and Research 

Arthur J. Murton 

Executive Editor Maureen E. Sweeney 

Managing Editor Mary Ledwin Bean 

Editors Richard A. Brown 

Christopher J. Newbury 

Barbara A. Ryan 

Ronald L. Spieker 

Norman Williams 

Publications Managers Elena Johnson 

Geri Bonebrake 

Contact information for the FDIC’s six geographic regions: 

Atlanta Region (AL, FL, GA, NC, SC, VA, WV) 

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New York Region 

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Catherine Phillips-Olsen, Regional Manager, 415-808-8158 

FDIC OUTLOOK 25 WINTER 2005 

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