And thanks to the industry's success at diversifying into other financial services such as mutual funds, insurance, and securities underwriting, many banks are seeing a sharp rise in their fee income as well. But despite that strong showing in 1999, there are storm clouds blowing. The effect is all the more pronounced because many banks, having run through their deposit bases, have been forced to turn to higher-cost borrowed funds just to finance new loans. Fed hikes are also putting a damper on some of the banks' hottest markets. The Mortgage Bankers Assn.
Analysts blame the liberal credit standards of recent years.
Other banks may follow, say analysts, who seem especially worried by the industry's increasing reliance on one-time gains. Many on Wall Street are quick to note that the industry's plight isn't nearly so dire as in the early 1990s, when a flood of soured real estate loans created the most bank failures since the 1930s. But for an industry now reveling in record profits, the fall back to earth could still be hard. Continued strong growth and low inflation should support more lending activity despite higher rates. Regulators are likely to demand that banks boost capital and write off bad loans.