What is the FDIC Outlook for the remainder of 2003?

By: Jennifer Kramer

The FDIC has issued the fall 2003 edition of the FDIC Outlook which states the faster economic growth in the second half of 2003 could pose new challenges for banking and thrift institutions, particularly those that specialize in mortgage lending.

As stated in the report, the reluctance of businesses to hire new employees and invest in new equipment has been a significant drag on the economy’s progress since the recession ended. Possible explanations include sluggish sales growth in a weak global economy and reduced pricing power due to excess global capacity, which pressures margins and result in heightened cost control efforts. Other explanations include strong and enduring labor productivity gains resulting from the late 1990s surge in business investment, which may be limiting the need for business investment and hiring in the near term. Finally, it has been suggested that some U.S. firms during the past year may have been more focused on balance sheet restructuring, corporate governance and control issues, accounting and financial reporting accuracy, and the correction of other imbalances from the 1990s than on expanding their markets and operations. Over the next year, most of these distractions should fade, although weak global demand could continue to weigh on growth until other major economies begin to grow at rates approaching their potential.

The banking industry continues to do well and credit quality continues to improve despite this climate of sub par economic growth. The recent rise in interest rates, however, may raise certain concerns for the industry, particularly for mortgage lenders. These challenges will take the form of slower growth in residential real estate loans, particularly refinance transactions; asset extension risk, which may tie up capital that could otherwise be deployed at higher interest rates; increased unrealized losses in MBS and other securities holdings; and a reduced ability to generate low-cost, core deposits, as rising interest rates spur households to seek greater yields than those offered by bank deposits.

For a complete copy of the report, please refer to http://www.fdic.gov/bank/analytical/regional/ro20033q/na/index.html.

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