Financial Update (Second Quarter 2009)

Fed Gov. Duke: Economy's Effects on Banks Vary

photo of Fed Governor Elizabeth DukeBanks remain important financial conduits in today's economy, despite the rise of other funding sources, Federal Reserve Gov. Elizabeth Duke said in a recent speech in Charlotte, N.C., adding that the recession and turbulent financial market conditions are affecting different types of banks in various ways.

In remarks at the University of North Carolina Banking Institute, Duke noted that while the nation's largest banks have reduced lending, smaller banks as a group have actually been expanding their loan portfolios.

Looking beyond the headlines
She said that the attention paid to constrained lending by the nation's largest banks can overshadow the activities of smaller banking companies. In the fourth quarter of 2008, lending on a merger-adjusted basis by the five largest institutions decreased at an annual rate of about 16 percent. Meanwhile, the next 20 largest bank holding companies cut lending at a 4.25 percent rate.

Transcript of speech off-site image
Gov. Duke's biography off-site image

However, bank holding companies outside the top 25 increased their lending in the fourth quarter by about 5 percent. "This loan growth may reflect that smaller banks in strong financial condition are finding that they can gain creditworthy customers—even in the current economic environment—as other banks cut back on lending to conserve capital and liquidity," Duke said. "Smaller banks may also be finding opportunities to reclaim consumer and business customers from nonbank competitors who have pulled back as the securitization markets have dried up."

A larger piece of the pie for smaller organizations
Banking companies outside the 25 largest held $3.3 trillion of balance sheet assets at the end of 2008 compared with $6.4 trillion for the five largest and $5.2 trillion for the next 20. The smaller institutions increased their holdings of commercial and industrial loans by $4 billion, real estate loans by $17 billion, and consumer loans by $9 billion during the fourth quarter. Overall, these institutions increased lending by about $27 billion, though still far less than the reductions in lending by the 25 largest banks.

"There are many types of banks in the United States, and the extraordinary stress in the financial system, the downturn in the U.S. and global economies, and the associated reductions in asset values have affected each bank differently," Duke said. "As such, some banks have likely fulfilled the credit needs of consumers and businesses that had been turned away by their peers."

April 27, 2009