|Real Estate Could Pose Challenges for Some Banks
Overall the banking industry remains in good shape, but real estate problems could pose challenges for some banking institutions, according to Brian Bowling, an officer in the Atlanta Fed's bank supervision division.
"The reversal of a long run in housing appreciation and the sharp corrections in real estate markets in parts of the Southeast substantially changed the region’s banking environment in 2006, and those pressures have continued in 2007," Bowling said. Nevertheless, bank earnings have held up, capital levels remain ample, and loan problems have been contained.
Slowing markets, margin squeeze loom
Looking ahead, Bowling said some institutions could see fewer opportunities to make commercial real estate loans. He also said some commercial and retail borrowers could be constrained by higher interest rates and tighter underwriting standards.
These real estate–related issues are particularly notable in the Southeast as many banks rely on real estate development and related loan growth, which has slowed along with the housing sector.
What heats up cools down
Nationwide, commercial and industrial concerns were borrowing less from banks because of borrowers' increased use of internally generated funds and decreased needs to finance investment in plant or equipment, as well as a shift in customer borrowing to nonbank sources of credit, according to the Federal Reserve Board's July 2007 Senior Loan Officer Opinion Survey on Bank Lending Practices.
Despite some challenging circumstances currently, the Southeast remains a fertile market for de novo, or start-up, banks, and the longer-term outlook for banks in the region is favorable, Bowling said. At the end of the first quarter of 2007, the Atlanta Fed's region was home to 28 percent, 142 of 507, of the nation's de novo banks that had been open for less than three years. Among banks started during the first five months of 2007, 19 of 71, or 27 percent, are in the Atlanta Fed's district. Bowling attributes this development in part to continued strong population growth across the Southeast relative to other regions of the country.
September 4, 2007