Tough Times: The Southeastern Economy in 2008
Banking buffeted by financial storm
Shock waves emanating from Wall Street and residential real estate markets rattled the financial sector in the Southeast and the nation in 2008.
Many of 2008's problems surfaced in 2007—falling home prices, rising mortgage defaults, and foreclosures that led to losses at banks and other financial institutions. During 2008, U.S. financial firms absorbed write-downs and credit losses totaling more than $650 billion, according to Bloomberg News.
Financial and economic currents in 2008 fed a vicious cycle that played out in the region and throughout the nation: Poor economic conditions and weak employment contributed to further deterioration in residential mortgage loans and reduced the quality of many other types of loans. Riskier borrowers led cautious lenders to tighten underwriting standards and demand higher interest rates, further restraining economic growth.
Financial institutions in the Southeast were not spared. At large banking companies, deteriorating real estate loan portfolios led to higher loan losses and lower earnings. Many banking firms reduced their dividends to shareholders. The situation was equally difficult for community banks, defined as those with under $10 billion in assets. Among sixty-one community banks the Atlanta Fed supervises, the number of troubled institutions, as classified by the Federal Deposit Insurance Corporation (FDIC), more than doubled during 2008.
Other financing mechanisms, such as commercial paper, also were sharply curtailed. The Federal Reserve in 2008 took numerous steps to try to address this lack of liquidity in the economy (see the sidebar).
Financial institutions in the Southeast particularly suffered in 2008. During the fourth quarter, for instance, the share of unprofitable banks in the region rose 27 percent from a year earlier, to just under 50 percent. A key measure of bank profitability, return on average assets (ROAA), tells the tale. Since its cyclical peak in the middle of 2006, the median ROAA for banks in the region had dropped by 87 basis points by the fourth quarter of 2008, a much steeper decline than for banks outside the Southeast.
An ROAA of at least 1 percent is generally considered a mark of strong profitability. By the October–December period of 2008, nearly 80 percent of southeastern banks, compared to just over half a year earlier, reported an ROAA below 1 percent.
The major reason for this decline was a deterioration in asset quality as the year progressed. By the fourth quarter, 3.83 percent of all loans were noncurrent—more than ninety days past due and not accruing interest. That number was more than double the percentage a year earlier and well above the peak during the 2001 recession.
As the financial crisis deepened, some banks closed and reopened under different banners. Seven banks in the Southeast failed and were shut down by regulators in 2008, equal to the number in the previous eight years combined.
Meanwhile, companies had trouble securing financing from sources other than banks. Firms turning to the corporate bond market found it costlier to issue debt to investors, who were skittish about the economic outlook. Consequently, many companies apparently deferred issuing new bonds. In August 2008, for instance, investment grade bond issuance totaled just $26.5 billion nationally compared to average monthly issuance of about $83 billion in 2007, according to the Securities Industry and Financial Markets Association.
Consumer spending slumps
As in virtually every other measure of economic activity, Florida suffered the region's biggest hits in consumer spending. Florida's sales tax revenues, which have declined steadily since a peak in 2005, slipped 4.1 percent for 2008 compared to 2007.
Auto sales were especially weak. From January through December, the number of new vehicles registered in the Southeast plummeted 21.5 percent from a year earlier compared to an 18.3 percent drop nationally.