Financial Update (Second Quarter 2002)

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Banks Weather Downturn

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Banks Weathering Current Downturn

Banks across the nation have fared much better in the most recent economic downturn in comparison with the previous downturn, in 1990–91, according to an article in EconSouth (First Quarter 2002), the Atlanta Fed’s regional economics and business magazine.

In the last recession, there were a large number of bank failures: 205 in 1989, 160 in 1990 and 109 in 1991. In contrast, only three banks failed in 2001, and only a few had failed through the first quarter of 2002. What accounts for the relative health of the nation’s financial institutions despite continuing economic stresses?

According to the article, banks generally remain healthy because of fundamental changes in the structure of banking, including greater geographical and product line diversity, better risk-management systems and the fact that banks are better capitalized today than in the late 1980s.

District banks better positioned
The article also points out that large banks in the Sixth Federal Reserve district may have some advantages over their peers outside the district. For one thing, loans from large Southeastern banks are relatively more concentrated in real estate lending and less focused on commercial and industrial lending, areas that have been more affected by the recent downturn. As a result, losses related to trouble spots like Argentina, or troubled companies like Enron, and other syndicated loans have been more moderate at Sixth District banks.

While performance by community banks in the Sixth District has been slightly worse than by community banks outside the district, Southeastern community banks have fared relatively well during the current downturn compared to the 1990–91 recession.

Despite banks’ performance to date, the economic climate is nonetheless challenging. That’s because credit cycles typically lag economic cycles, a trend that could make 2002 a challenging year for banks even as the nation’s economy improves.

To see the complete text of the article, go to Periodicals under the Publications tab on the Atlanta Fed’s Web site (www.frbatlanta.org).