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fEDERAL RESERVE BANK Of DALLAS
September 1990

•

•

conOllllC eVlew
Banking and
the Economy:
What Are the Facts?
Cara S. lown

Performance ofEleventh
District Banks in 1989:
Progress but not Profits
Robert T. Clair

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

Economic Review
Federal Reserve Bank
of Dallas
Robert H. Boykin

"'_0

OwIE_.. OIfIUJl

Willhtm H. Wallat.
F.II_~M1d

0wI~0fI",

Harvey Rosenbhllil
s.....l'u~and

Drr«Ulr til ~

--""
,-_.....

Gerald P. O'Driscoll, Jr.
.... _

Onctof DlIIIt-.:II

W. Michaer COl
vaPm_1Ittd

St.,nen P. A. Brown

,_

~v;,:.~Jl

Economists
National and Inlemi/limBl
John K Hill

Evoo F. Koenig
Robert T Clair
car(l S lO'Ml
Kenneth M Emert
Joseph H Haslag
l inda C lfunter
Mafk A. WyfIne

Regional iNId Energy
William C Gruben
Raben W Gilmer
Mine K Viicel

Keith R. Phillips
lori l Taylof
Fiona 0 Sigalla
Editors
Rhonda Hafris
Diana W Palmer

Virginia M Rogers

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Contents
Page I

Banking and
the Economy:
What Are the Facts?
Cara S. lown

G.1l";.1 S. 1.0\\ n l'xplOl'l':-' till.: bank ing indw-ilry's rolt· in tht,
t"conom\" and 11mb c\"Itknn: sllPIXlrling tilt: idt":1 thaI nUc!ualions in hank cn... dit

;In..'

n.'I:1\(.'d to tlllt'(U:][julls in c;l"onolllic

actidty Sht· :Ibo I1l1d" Ih:1I h;mk a:-'...el h()ldin~s adjust hefore
chanj.!cs in economi(" <ll"tiviIY and Ih:1I Ihl' h:mking systcm's
SlTurity-to-a:-.."<.·[ 1~llio strongly pro.-din... t,.'l"(lIlomic gro\\,lh. By
an;l ly/.in/-: It'rm... or hank lending on:r the: hllsim.." t'~'Ck·.

1.0\\1l ("om:ludl'!'> thaI

\'~Iriali()ns

in kndin1-( I!.:nus art: consistent

with till: ar).:Ullll'nt that ft·"tndion .... on IXHlk IT\:dil <lth"l'r..(.·ly
:,Ilt.-t"! Ihe l'(:onol11y. 1.11\\ n ":- ....[tldy I\.·nl'l'h ,]11..' fl'lll'WL'U inlL'R'SI
ill the roil: of h~lnkin/-: in ,hL' L"('onoIilY Ih;u l1a.' ("oinddecl with
thl' lailure 01 Illan\ hank, :tnd ~1\lIllo!~ and lo.m :11>.·'.ol'ialion....

Page I ~

Performance ofEleventh
District Banks in 1989:
Progress but not Profits
Robert T. Clair

CCl!lllm'T'('ial h:lllk, in Il ll' EIl·,'l'nt). F(.·tlt'l":l1 I k~t.·1"\·l·
[)i ... trit."t t"<'dul"t.·d th~'lr lo'~t.· ... suhslalll i:liJ\" in 19H9 but :--LiiJ
t"Ol k,(·tin..'h" fl'POI1L'd a los:-- lor lht., ~·t·;.r. TIll' illlpro"l'll \{'nr
primarih rt'slIltnl llulll itl{'r~·:I:-.t.'S in rt.·t' l1l{"(IllK'. In addition,
l:IL'\L'nlll Dislnl"1 hank .. rl·duH'tllht.'ir nOIlpt.'I1"orllling 10;111."
;l1ld 11ll' (."OSI:-- ,1'..... o .. l;lI{·d \\ilh Iht·:--t.· lo:ub. I"k-"pilt.' till' im·
plll\'l·Illl'nl. Dblrll'l hall"" ..,ill h:l\{: 1'I.:l:Ili\(.'1\ brgt· holtling...
or nonpl:rfonnin:.: loan... ;Intl ft.·lxl:....... t.'s.,~•.'d ft.·al t.· . . t:lIt>
IklLIlK~' .. ht'L·h 01" rk\t.·lllh I)i .....lri ..·, hank, :--ho\\ 11K'
t:rrt.·l1 .. 01 corn'<.1ing Iht.· prt/ilk-Ills 01 10\\ 'lIlI,IIiIY :1 .....'>("S
CI';lrging 1.11 1111I1rX·III.nllin,L: I(lan .... rL,dllt·t.·t! t',IPI':II;lt I)i"' ri("
h:lI1k .... In ft.·,POI1'L· 10 Il·<fllt-xl Llpil;!1. h:IIlk..... l"f)IlII~IClt'd Ilwir
it.'nding ;1L"li\ih :lIld iIlH"'t.'t! ill liquid :1.....'1.:1.'. \-.;.'>('1 gnJ\\lh 11;1,
ht·t·n n'I"\' \\1':11\ ;1Ilt! lill' ).:11)\\lh fl·. . .uht:d prim;lfih' frolll
h.lllk.... ,Kqlliring bil ...d ":11 Ill).:..... 1Ilt! 10:111 :1'.... ou.1I11111:'>

•

Cara S. Lown
Senior Economist
Federal Reserve Bank of Dallas

Banking and the Economy:
What Are the Facts?
n unrrl'Cl'(It'ntL'd numhcr of hanks ;m el S:I\'ing.... ' 1Ilel 10:111 :!ssol'iations faik'd in tht" t lnited
Statcs during tile 19~h.. :lIld morl' than h:l lf of tht'
fai1urt,s Ix'currC"d in Tcxa'" f\1:11l)" of 11K' Tcxa ....
f;u1un.:s ('an he ;Lw'ihutt,d to oil pri('t· mon.'Ill(;'nts
;n thc I..'arl\· 19HOs an<llhe rc ... uhanl downturn in
IhL' SOLlthwcs! region. r.x('L· ...."hL' risk-laking has
also Ix'cn ('ill'd as :1 nmtrihutin!( faclor (SI.'C GunI her 19H9). Smllt' ohst'rn'!"'o h;I\'c ar!(lIl'd thai Iht'
1 9HC~ do\\nlul"n in the: "l"I..'X:I'" I..·('ollomy \\";1 ... m:ldt.'
\\'OJ-:-~' hy IIIl' hank failures. ;\Iol"eon·r. ('\'cn
though thc Texas t'('onvm)" ha ... hCl'n n..'<"on'ring
sincc 19tC. Mlmc hbnlL' thC" ,,10\\ p;.n.' of the n.'<."on:ry on till' 1II1\\"ilhngnC"s..... 01 h:mk:. 10 lend. I
Tlw}" :lrgll~' thai hank.... in "rex;\., and IhllJllgholit
1I1L' ~'(lllnlf\ h:!\c l't':Kted to reL'I..'n! hank f:ulurcs
hy limiting till' .""pply of l"f('d i1. T ilis rdll(·t;L!KC 10
It.:nd hmls im·t'st IlH:1l1 and I.·con!lm ic gru\\"t h. ~
The argUllllO'nl Ihal h:lllk failurcs 1.It'~·rl.'n
(·conollllt· downlurns :lIld slo\\" cconomic I"I.'con.'l"i<.:s is ]):I:.t'(l on IIlL' ht'lief that tlw h:lnking illdtl.~tl"r
pl:l}"!', a spt'ci'll IUlt.: ill 1Ill' tT()nOI11~. inlcnncdiating 1)(,1\\ l'e:1l hOlTOwl·r.... :I Ild lend..-rs. ,Of only do
hank faiJun.'s k';Jd dirt'clly 10 joh In ............. , hut. mort·
illlport;1111. thL.' bilufL.':O- illlernlpi rhe: no\\" or CJ"l'(lit
fl"om lendt'r... 10 hOrnl\\l'l .... tllr~'ITlIpti()n of Ihi:opnKl's", h"rt ... firm ... thai d~'I X·l1el Oil hank:. for
fund:. '1 hoM:' thaI ' Ir~' un:thlt- to ohlain fum]., ('Ist·\\ Iwn.: "ill ht· lorn'd to I.·UI h:l('k on ;11\ l~."'lllll'nl. If
l·nouj.Ch finn ... ;In.- :Itfl'lll..·d, ;1j.!gn..'~.II c: economi('
;L("li\ity "'ill 11\; L"lu1;liit'(l
P:1l11y IJ) r~·sl)(IIl)ooO,.'IO 1111..' I"l'('c:nt h;ln\.. failL1rt.· ...... \\;I\C" 01 tltt.·Ofl..'lil':11 sllldiC"~ ha ... llI.'t.'n
1IIldt'lukC"1l \0 c.'I:.llninl· ho\\ h:1l1ks tllk'I~lh:' and
thc roll.~ lhl'Y p1:1~ in tlK' t'{"Ollomy Empiric;1 1 ....lUdic.... h;I\'l' "ho IX'L'1l Ulldl'l1;lkt"n to IL'''I Ihl' \ :l l idi!~'

A

F.t'Ollomic Review - Scl'lcmhcr 1990

of 'hL' IhL'Orclil':\I work. But a nlllnher o f hypothc!'>cs PUI rOl111 by thl' theOJ'et;<:al lill'r,lIure han: not
}'l:1 IX'l'1l (.'Xamined t'mpirk:ll k. In Ihi.s :111kk. I
t:x;lllIint' tlu..:s<" hypothcsc,> and . in doing :.t), UIl('O\'L'! :.l:\cr•• ! inlert.~lin).t empirical rL'gularitit's
h(:IWL"t.'1l h:mk lendjn~ and <:n)llomic 'Kli\'i!}".
Fir:>t . I find Ih:1I adju,unenb in hank ali."'-'\
holdinw.. IL'IH.I 10 <X:cur hc.Jore changtc"s in c("()nonllL' acti\'ilr Bank ]0;111'> lend to bll. :lnd S(.'('urily holdlllg.' lI.:nd \0 ri.~. hdore:1I1 L'('ollOmic
downturn The opposite IXXUrs prior to or along

with;1Il L'('onOllli<.' upturn. I also nnd that. 1"I..'l:ilin.'
\0 othN h:lnklllj.( :-y:-.IL'm \'ariahle ..... Iht' .'iCcurily·to:1,...\.,\ roll io h: .... thl' ... Iron~t:sl prediL1i\'L' link w ilh
n::l l t"c.'unom ic.' ;K't i\·iIY. Thi:o- link h:l" not hecn

l'xplon.:d prl'\iously.
An I..'x:ull;n:uion of Ihc term.... 0 1 hank lending
O\'l'r Iht, hll ... ill~'SS cyele rl'n."11s Ihal th t' percelll:I)o:t" of sh(l ll - I~'nll bank hXll1S rL'!<I\;n:: \0 1ollA-h:rm
]0.111 .... I11neaSL'" l x:fOll.' cl'Ollom it,' downturn ..., :lIld
dC"L"rCasL's Ix·forl· Upllll·IlS. Such :I n::, lationsilip is
nlllsi.... lcni \\ ilh ItH,: ide:l thai hank.... n:strici (.Ted it
hy . . hOl1t..'nin!t Illl' maturi ty of thl" lo:,"s gr.lntcd.
This n:.'.lrit"tion. in h im. ;1(h'ersd\" :,flt'Cls t't"onomk' al"li\·ity. Fill:l l ly. I fjlld Ihal tht.' IX'rn'ntage
of loan ... m;ldt' un<k'r ('01mnilllll'nt is llq;:ali\ dy

Tho'dUrhot .'IOUIdblr.c k>thanI< /Jcwlald W Hayes Iorrese.... ch
I<oenog Robc<I T Cia" andWAaon
C Gtub!lll /01 helplul C0<I"W116I1Is
:lSS'Slanc~lIIIdEwl"F

SeeGupItlI 1m) FOI il/tI(lrO/noOfYDIC'- ilUubul"'grhe
c/(X;"'~ OIl C('(hllO both dern.."od tIIl(J supply liIC/orS see
5.1/o"r1Ol1

BID/fiefs, 1990)

rdatt'd 10 rc:d olltPllL Thi~ finding su~ ...,,~l.~ lilal
\\'ht'n I1nn.'i nOI holdin).! c()mlllilmcnt~ arc unahk
10 IX)lT()\\. l"l"onomic growlh I~ (·Ull:tilt'd.
Thc :1I1idt' proo.:ctb a.'i fol1()\\·~. Thc next
seetion TI,.·\·il,.·\'·s Ihl,.· main Iheorelical ar).!lImt'"nl.~
SUPlxlIlin).! the notion Ihal hank lx.-h:I' ior ha~ :111
i111P:ICI on cconomic grO\\ Ih. Th(' prediclin' linb
Ix.-Iwt't'n "al"iou~ hank balanl'C shecl 1lll':tSlIres
and I"t'al economic ani\'ity arlO Ihcn t:'x'lI11inNI.
~cxt. to dclt'rminc 1I1l' validity of Iht:' tlll..·orclicil
work, I explOft:' Ihe n:lation~hip IX'I\\"t'cn hank
loans and \',J]"ioll~ intcrest 1111l' measures. Tht· rcs lI ll.~ fl"Om cx:ullin i ng the Il'nll:-' of hank k-nding
m'cl" 11ll' hllSillt'ss ('ych: arc tht"n prt'~nt",'d. 1'01Im\"l'(1 hy an :malysis of Ihe Jink hetw~n hank
Gl pilal and h:lIlk lending

Theoretical background
lkn'n[ emph:l.~is on lIndt'rslanding Ih ...· m icrofoundations oJ m;JcnX'l'oJl()mic hdw\'i( )r ha.~
gem::r:;lll"d a fl'newl'(l inlt'rest in the rolt' of the
1:r.lIlkiu).! !'(.'{lor in thl' cconomy.' And" hile nonhank nnanci:11 instilulion:-. :Intl the t"()lllll1cn.:i:11
papcr mark ...·1 ha\"t' increasingly p rO\'idt'd :1 11t'l"I1a lin' .~Olm.:e.'i for IO<lllahk fund.'i. hank It'ndin~ in
the p:l .... t len years :1:-' :1 Ix.-rl·t'n\age of towl :-.l1orlt('fln husiness crt'dll Il:I.~ dcdin('d only 3 IX'J"l"t'nl age point:-., from 64 pt'rc!:'J)( to 61 pelT!:'lu furth ...·r.
in 19H9. roughly 40 lx:rl1..'nl of incQnH.· I..·arnl·d by
m:mufacfuring firm:-. wa~ gt'nl'I~lIed hy IInn~ lhal
ohl:,int'd Illl' hulk of thcir sh0l1-lerm IX)fJ"llwin~
fro m hanks.'
In this s.... clion. I prc~cnt lhre ...' argumclll:-.
Ihat han.' hel'n gin:n to Mlpport Ihe h)'lx)(Ill'"is
thaI hank l"'I('ha"ior-in parlil·ul:ir. hanb' \\ illingncs.~ to It'nd-ha~ a signifiGtnl il11p:I('1 on 1"eal 1..'l'0nom1l" acti\'ity. I also discus.~ tl1l' implica[i()n.~

For II (ev/(fwollhe lIIemlUle OfIlflc role 01 Danks. see Gel/l6r

(1988'
Manufactuflng 'orms WIth /IsseIS 01 $250 In.ihotl or less
obtBln roughly 85percem 01 /heir shorl-term OorfOl·.'Jng 110m
bankS These {Jlms {JCf1er8le 25 percent 01 tile mco",!!
eill1l6d by manolactUf"'9 /'(111$ Flfms WIth /tsselS bci".-eet"1
~rrWI/Ion and $t bIIIIOt! OOIa", 70 pctC8fl/ 01 the1f shott,
term txxrowrng 'rom banks and generale 15 petccn/ 01

manulSCiUf/fI{J mcome sec US Bureau 01
(1990). 2--5. 116· 3t1

,

/lIe Census

thesc : 1I·gllmcnl.~ h:l\'t' for Ih ...• h .... ha\·io)" or :-.l'n'fill
m:1Cr()(."'(.·( IJl(lmic '·ar;ahlc.:~.
In 19H1. Sti).!lit7. ,lIlU \\'ci.s:-. argllt.'d tlwl I)t'GillS.... hank.... cannot S(Tl..'l·n OUI h:td 1xll"l"Owcr.~
suffkicnllr. intel"c.·;( rate~ arl' not 1lt.'"Ces.~:lrilr Ihc
t:quilihr:lling IlH..'{·hani ....m in Ihe ned;t markl'l. As
imen..'.'il r;ltl·.' riSl.'. lilt' l"iskiTll~ 01';1 han" ·:-. IX)rrfolio
will inne;!......• if rl'lal ivdy s;lfe hOf1"o\'·eI"S. unwilling
to IX1r high ratt's. drop (Jut of the loan markcl
(the ;l(h't'"rS<,' st'"icl'1I0n dT!..'{·o, Additionally. horl1l\n'l~ \\ ho are willing 10 I")(JITO\\ a( high inlt'1"CSI
rales Illa} do so onlr bC(:.IUSt' Ih('ir prob.lhililY of
rcp:l}'lllcnl i." low !tilt'" 1110r:11 hnard (.'tl"t.·("11 "";111 a
riskier Ixmfolio. h;mk pronl.:-. l'ould f:ll1. To :"'oid
su('h :1 sl·en:ll;o. h;lflk~ choose not 10 USt' the loan
"lit' 10 t.'{luilibl~IIL' IO:ITl supply wilh loan tk"mand.
Instead. banks 11I110n 1)()IT()WI..·I~
The cfl'{lil r:Hioning theory propo.\{.·d hy
Iht.·se :lulhof}, pn:di<.:t:-. thaI if Ihc rcoll intercsl nllcs
a\'aibbk- on st'('"llrilie.~ risc in re.~pons{' to [ighl
IllU1H.::llB)" polk". hank loan l"!CS will fai l to kl'l'P
lip and thl' .;uppl} of h:mk crL'dit will he Cllrt:lile<l.
Ilentx.'. ht.'plild :--Ollll: point. int",·rc:-.I mle.~ in Ihe
sl·curitit'.~ m:lI·k!..'\:-. should hc inn·rs<.:ly rehil cd 10
Ihe supply of hank loans. MO\'cment in Iht'S<..'
interesl l~UC:-'. hereafter fek'rred tu a~ II/UI-kel illf('r<!SI /"(/1('.... ....hollkl also produo,.' ;J posit in' n:i:llionship lx.:t\\·('C/1 tht' supply of 10:111... and Iht! sprc;1(1
l>cl w""('n loan I,IICS :111d Ilwrkel 1';IIL's.
A :-'l'o,md tht"OfY I'lllph:lsil:ing Ihe importancL' of ('l1:'dil for 1'(;:11 t'"nlflOI1lil" ,1<:li"il)" ;s put
fOllh hy Bernankt' :tnt! BlindL'1" {19&H, Tht'}" ar).!lIc
th;lI. l'\en \\'itlllIUllllc :lSSlllllPli()/1 (If l"I'(..'llit mli()Ilinl4. I.."Il:lngL'':-' in Ihc "lJ(K"ation of a IXlnk·:-. Ixmfolio
G ill aIT"'·l'l tlw 1'0.::11 l'l'onomy_ If IXllld~ and hank
loans ,IfL' il1lfX'rfecf ."U h:-;fitule~ ..~h()<.:k~ tllal l"l'(ltKt.'
[h ...' suppl)" of hank (Tcdil will rt'dul"t: t h .... lot:ll
amounl 01 lTt:uit I:!xll'nded For exampll', :In inlTt::lSC II' 11ll' 1X'l"l"ci\'ed rhkinc ....~ (If loan:-. l'ould
prodlll"l' SIKh a .~hock. As a result. ;I1\'eSlmcnt
would hL' rt:"dUl"l·(1. Tht' idl':1 beh i nd this argument
i:-. thai fjnn.~ that ..lrc un:lhle 10 ohtain hank financing for ;1 projl,.'"<..l w;1I lik,:'!)" find il difficull to ohlain fundin).t dscwhef"l..·. \Vh .... n hank.-. shIft a\Yay
from i."Mling loans. Ih ...·}" shift into holding Sl'curilie:-.. ;1 subsw ntial portioll of \\'hil"h af(.' LS. gO\L'nllllcnt sccllrilil'~. Ikcluse gm'efllllll'nT IXllld .~ do
no! rcpl"I..·sl,'nl till' .~:lIllt: !c,'d of IllI·e:-.llllent <IS
rrh'all' homb or hank loan:-.. sl1ch a .~hift prodllt·c:-. :1 fall in :Iggrt'gall' inn':-.IIllL'nt .
Federal Ke!rervc Bank of Dall;tS

A \\"idc:.prt.·ad .. lI ift :lJllong h:mks away from
issuing loan:. IowaI'd holding sl'Curilit's will lx'
a:;.socialt'd w ith an innc"",-, in inll·n,.'st r.lIe .... on
loans :1Ilt! ;t dl'ne:l~' in intl'l"..: .. t "Itcs on IXlIlds. A
dl.'lT(,.';tsC til Iht· sl1pply of crt.·clit will. tht:n:fol"l·. Ix'
:1.......OI.."i:tll'd w Ilh an illcr..:;!.'>!..· in till' spread ht'I\\l't'n
10:10 rale.'" :lnd hond ratl·.'" Similarly. :111 in('~ast: in
Ih~' ~l1pply of <..'fedil ShOllld Ix: ass(x·iall.'{l \\ ith a
d C<..'fC:t.o;l' in Ihc sp J"l':ld IX.'I\\'l·l·n 10:ln "lit'S and
bond l~llc."'. In olhl'r words. in eon l l~I SI 10 Si i/:{lilZ
:Inc! \\ ·ci .... s. Ikm:l nkc and Hlindt'r h)'pothl'sizl' Ihal
till' alllouni o f IO;tlls isslled is im'crsd y rd:lInlt o
thc srrt 'ad h",·lwl.'l·n [O:Ul 1~1I1.'~ :1I,d l\1:u'kcl intcrt.·:<1
l~tll"O;.

Till' la.o;l Ilypothl.'.o;is about hank IXOha\-ior
111:11 ! \\ ill prl.'.o;l·n( i.~ fn)1ll l.krnankt, :lnd Gl"ll k'r
( 191-1"",. Tlll'se ;l ulh()I's tIL-n'lop:l IlJ(xld (If the
hanking .... eclor III \\ hid. tIlt.' ... iZl' of hank t·:tpit:1I
:It,d tll<..· pCrl"t:I\ l·tI qU:llity I'll' powillial :1 '<;'''<..'''' pl:ty
a roll..' in im esltnent A dedin(,.' in <.."itlK'r of tht:.'>l'
1\\0 llle:I"'llrcs pro<lu{..... s a shiff tow:lrd ...ak. !o\\"return ilHCsll11Cnls ( 111al is. g\)\·t·rnlll\·lll ~"{·urilic .... )
Thl'ir \\"01'''- Ihell . pro\'ldes fmllll.·r mot i'-:ltlOIl for
w ily. :I'" !krn:lnkl.' and H!indt'r argul·. bank:-. mighl
sh ift out or lo:ub and 11110 :-<..'{·urilics. If such a :-Ilifl
pron'~ to I'll' \\·klt.· ... plt.'ad. :lggrt'g:II<..· i!we.... tm\·nI
:md OUlpul wi ll I'll' aITl'\·tl-d.
.[ Itl' Iht·ori<..·s pn..'... t·nll'{l ht'rl' h,I\·t· implil':tlion:- for 1110111.'1;11") poll(,},. If 11ll' :lIllounl of <..'fedil
c :'l:tl'ndl'{l 11;,,:t1l il11p;lt'r on mn·SI1l1l·1l1. :Htl'nt ion
....hould fo("u'" (Ill po l it'~':- imp:ll"1 Oil \Tedi1 :1.'" wdl
:1.'" on inl<..·r..:....1 n ile.... Furlll,,·r. in :-itual ioll.... where
h:lnk clpn,tI ;,.., do.~\.· 10 till' lIIininlulll !t-I't'! ["l··
quirt:d hI la\\". lII(Jnl·t:tr~ pulil'y 1Il:IY he:ll1 indr.:clil"\' loul t(lr l' xp;lIld lllg ('rl'lIit <

Bank portfolio holdings
over the business cycle
In Illb sell ion . I lon:-I(!I.·r \\ Ill'IIl<"'r lk'nl':lSl'S
in tl1l' IX'rn'IlUgl' or h:ln~ :I .....l·t ... held " ... loa lb.
:lI1d illlTl';I"l':- in Ih\.· IX'I"<l'I\I;I,I-(l' hl'ld :I.~ "l·nlrilil·s.
pfl't'l'dl' dl·lItlll·... 111 n.:;I!l'{·(1Il01ll1l" :KIII'ill Condll(tlll~ "'lIdt :In l·\;tll1in:llIOIl is Ilot 111-'\\ In tilt'
I'rlh \\ /lod I 19-':; ) Iltll l·d 111:11 b:lnk Itnldl11g:- 01
"l','IIIIIIl', reLlli\l ' III I(':lth dl'{'rl-':I'ol' during l"P;11l
' I"n'" .lmlllllTl·,lo;l· dIll i ll).:, 1'l'l'l'o;SHlIb Bllt hl' did
lit II t· '\.1111111l · \\ bl·t IIl'l I!ll'''l' 11 101 \'II1l'llh pWI"l'dv
(1l;lI1gl'... III ;1!-t\.!l l ·g;lll· illl l·...lllIcnl {II tl ll'll'h
( ·tllnnlil·

:\IOft' ft'Ct'IlII)". IkrnankL' ;Ind Blindt'r (19H9)
t:x:tmint:d how ;1 t'han~t' in 1llonel:uy policy-a ....
lllt'a:-urt"{1 by " dlan~l' in 11ll' feder.11 fum_b 1~l\l'
(Ihe r,ilt' :11 whkh hank ... ll'nd 10 <..'adl otht'r>--arrt't'I!'> tht: b;l1lkin~ sr.... telll·.... h:II:IIlCl' :.hl't:'i \·:triahle:., l 'o;ing impulse re .... pono;e functions. IIll'Y
fOllnd thaI. for Ih t' tlrsl nine monlhs follm\';n/-! a
c(jnrl~H:tion in mOI1t'I<iIT policy, hond holdings
COnll~1("1 and In.1n holdings dlan~e \"I:ry l illie Suh·
st'<:lut'ntly. hm\t:\'t'L .00cclIrit)" hold inMs bq.!in 10
rehuild. \\"hill' lImn.... hegin 10 f:111 sl(,.'<l d ilr. Tht'y
also found I hal ch:l1lg<..: .... in t h(,.' lHlcm ployment 1~lte
OCCllI" ni nt' 10 IWt'I\'(: monlhs alkr:1 polk)"
(·hangt' . 'Iht')" argut' th:1l Ihi .... coi ncidt'll('e of liming Sllggl·SI.... 11l:11. in :Iddit ion 10 ope"ll ing Ihro ugh
tht, lIIonl')" supply. 1II0ncl:II1' pol icy Ill:ly HTy \\'dl
\\urk Illrough hank loan..... BUI Ih<..:s<..· aUlhors did
not dilvcl{r C(llllp :l n: c ll:lIlge.... in till' banking sptt:lI1'.'" h:lbncl' ... hl'CI with l'hanges in "ggrt.·gale
inn.'sllllt'nt :tnd outplll
En)ll<)IlIiSIS ha\'l' :lls() ..:xamim'{l W!Il'lh<"'r
Il\O\·l'III<..·nts in the growlh "Ill' of hank (:rt.'{lit h:l\'l'
prl'cl'dl·t! mOn'nll'l\b in the growlh 1~ l l e of mllpul. King (19Wil found l illie :-uPlx)(1 for sllch:l
I"l'i:llion .. hip. \\hik- Bt'rnanKc ( 11.m6 ). Ltl\\ 11 (19HH1.
:lnd 1.()\\1l and lIa\·l·.~ Ill)I)()) fou nd Ihat such a
l"d:tlionship dl'lc" ex i:.1 UUI link- altt'ntion h:ls
hl'l'n IXlid 10 Ihl.· l"t'!alioll.... llip het\\'<"'C 1l loan
gro\\'11I :tnt! ill\'l':-llIIl'll\ glU\\'ill and 10 Iltl' n: b lioll....h ip hcl\\'l'<"'n ('h: II'~<"'s in thl' cOIII/H.,silirm
Ihe h:lnkin,L: _~r:-t l'nf.o; Il:Ibll{'<..· Slll'l't and ~·ha ng..:s
in iH\e.~lnll'nt and OulP1i1.
Ch:H1 1 tk-pil'l.... 1110\ ~· IHCI't.... in h; tn k :IS.~l't~
around hu~illl·S.~ ~'ydt· Itllnil)!! point.-;. T ill' ("h;1I1
prt·:<\.·l1ls the growlh 1~ l\e .... of Ill{' ratio of IOlal
11):ln ... II) 1.)lal :1"St·I.' :llld till' l~lti() ()fl()l al st:{'uriti(;'s
10 10t:1I :t,.o;l'ls 1l\.·ld hy till' hanking SlOt·tor from
II)~<) to IIJH9 TIll' darkl'l :l rl'a .. llIark l"t"n::s.~i()n:l1)
rK..'ri< )(1,
\\ ith [Ill' e_'\t"l'plion 0 1 thl' 19HI-H1 fl't·l·.o;siotl .
11ll' hl:Ul 1;l\i(1 k\ds nlTol d<..'cl illl':' :lIld Ihl' Sl'CU,
lit\ r,l1ill It·\t'! ... (In III' ri,l" hef(lrl' l'\-l'l'\ rl·l·l·S.... i(JIl
... mn· I,,~t) llUl'ing Ihl' 11)1-: 1--.'11 I"n·\·s... ioll. Iht.' mil
't'rll" f\·\l't''''{·l·OUt...(· onl\ a... I Ill' rl'Cl's,ioll hcgill:1"0110\\ IIlg rl·n· ....~IOIl.... Illl' IO;ltl r:uio lx-gin .. In

or

n.l" f tfJlJ!IJ vI'ers !Of'",,,,l/ pOI;$JbIc po/J< -\ ' '''NXl''SC-S 10 <JlrJ
I~-"'~ 11<;.l,~I,I/V"I~"1

\

Chart 1
Growth Rates of the Ratio of Total Bank Loans to Total Bank Assets
and the Ratio of Total Bank Securities to Total Bank Assets

P.-

Loan growth rate

5eaJrity growth rate

Percen,

"
10

10

,

o

- 10

o

-,

-~­

b_

SOURCE OF PRIMARY DATA: Board 01 Governors. Federal Reserve System

inl'rl': I ~' :m d , h(..· sl'('u ri,y r:ll io I x:gi n ~ 10 bl l.

rough lr :ll l lIc ...alnl· ,il11l' OJ' iU ~1 :rfler ,hL' n; pa nsions gl 'I umll.:r w:ly. Th u.~. Illl·H.' :lp pt·;l r... '0 he
:-OrllC t'\'idt'Ill't: Mlpporl ing 1111: I(k-a ,h;1I ad jus,Illt'n1:- in h ank aS~l'l hold l11K'" I;,kt.· pbn: Ix:fon..•
t·hange.... in l"nJlltJlllk :.lI in,y.

Empirical teslS
Tbi,... M.'(·linn

p"'·. . I,.'n,... 'he "":-lIh~ 11'0111 :-Ialis,i-

(';.,liy eX:l1llining 11ll' rd""01l~hip IX:I\\ l'l'n each of
Illl' hanking .... ~·~Il'm\ h .. bI1H· :.hl'(." \·ari.,h!t:.... ami
aggrl·j.(alt· i 1l\'t'~IIllt.·nl and OUlplil . Tlli........t·(·, 1011
.. b.ll rrt',"L·nt~. I()r (,()Illpari"llll. rl· ...I,I!t.... fnlill l';"::'111'
illlllg Ihe rl'l:u lon ... h ,p IX:I\\ <.'cn 11ll' monl', ... upph
:lI1d ime"" Illl'nt and out pul <'; I';.lIlgcr (,;llI ... : . li l ~- Il·.... I ...
;11'<.' u"'l·d fOI Ihi ... PUI'j)(IM' IA·... pill· ,lIl'ir nallll·.

' 1,<.· ...l · t l'~l.~ ( lil ly d l·ll·rl11 ill<.· Whl'II 11'j' Im)\{·llll·n,... i ll
Olll' I :Irb h k' il·l11 por.l lly p rl't'(;'(k·. o r hel p p l'l·dicl.
1110\·('I11('n' ... in :Ulodll'r \·:l rl;,h ll'. T hl T(;'IIJ1'\:. ",h ik
II ll'y I.':Hln()t dl'l l'rrn;nl' \\ 1ll'lht.·r mO\'l·Ill<.·nt ... in
ha n k a:-~' t ho lding.... C(fI IS(' 1ll0\l. ml. nt.... in lX'Onomic :KII\ i,y. III<.':-t" 1t·:.I ... ('an ti<.·tt.'nni lll' wllt'Ihn
d l ;1I1j.:L·... in [hl' b:iI'lIKl' :-hl'(:[ \:1ri"hlt-"'/)I1'('t/e
Cklrl).:l·... i n lX'onomk 'KIII 11\
In prt.·\ IOU'" \\ork. I hal-tO l onl.~l'{l on I hL'
pn:di(·[l\t· n:btion... hip h(.'11I I..'\.·n 'owl 10an.."'1 :1I1d
(lulPllt C1..1l\\ n I')HHI ;lIld IX:I\\<"l,:1l a hro.ltlt-r l11l'a"'llrt.· (If lTt'{lil :lIld IIUlplll ( I.o\\n .1I1d 11:1\<.:'" 1990'.
Ikrl..', th('lcKU'" i, 1m 1ll1)\l'Ill('nh inl(),' n :. l1d
:-l'l'uri t ~ holdin~~ l1.JaIlH· [0 [ola l :1"o."l'[ holdil1).:.....
for (·ol11p;l r i... on. hO\\l·\·t·r. 1 <.'\,;1111;11(' 11K' k\d~ or
lo an ;lI1d "'l'l'u ril~ holdjn~........ I\dl In ;,ddilion to
[ Il l' rd al lol l."'IlIip \\ ilh Olllplil. t lK' rd:u io n .... hip II il ll
....:dcral Il cst'Mll' 1I;lJIk of

l):oll~s

in\"l~Sllllent

i:-. abo considered flJr l':Kh \'ariahll'
'111e independent \·:ubhle:-. lI'.l·d in tIll' le ... ls
:l1V 11ll' l'onm1l'rcial banking s(:('lo(:-. lolal lo'IIl:--.
10la1 .'>l·••.'uri l)" boldin~.... loan-Io-;l,,:-.!..·I r;llio. ,lnd
:--ccunly-lo-as:--l'l l~ll i o and tIll' monl'lafY :1~reg:Hc...
~ II :Illtl ~ 1 2. Tht' dqx:ndenl \·aria1>I1: ... (lhe \'ariah k ... 10 Ix: explai lll'dl afe n;;11 gln..:-. nalional
PI1XIUCI «(;:-';PJ and ti ll.' wos... im'l'Slllll'lll l'omp<)OI:nl of fl;";tl G:"!'P. I knn~. :-.ix rq~n.;:-.:-. ion ... an: e:-.ti111<1ll'(l for each dqx:ndl'lll \'ariabk: Ihl' da t;1 ll"l-x.l
,Ire ."l'a:-on:t1Jy adjll ... tl'tl. qu:u1erly d:1I;1 for tht:
ye;u~

19')9-B9.
n~forl'

condllc ting 11K' caus:tlilY le ... I:-.. I PUI
c:lch ,"l·rie:-. in :-.1:tlion:llY form This procedure
gU;II~tn\ee... thaI a rdaliollsbip hCI\\(:cn 1\\'0 \'ariahh: ... i:-. nol ha:-.cd llwn:ly on In:nd:-. in Ih<..· data.
W ilh the eXl't"plion of 101;11 lo;m:-. and 11lL' s<""'l·ufilylo-:tsSl.:'t r:.lt io. e:Kh :-.!..·ric:- \\',1." found 10 Ix' stationary in its ).:rowth 1~lIe, Thl' dl'lrt:mkd series
were found to hl' :lppropri;lIl' for lol:tl lo:m:-. and
Ihl' St:curitY-Io';lS,"l't 1~lti(J.
!'\exl. the number of 1;lgged dqx:ndellt \·:triable:- 10 he indudl'd III ead1 re).,:I"1.......... ion m ust Ix'
dl'tcnninctl. The ide;! is that 1';1:-.1 \"alul" (If ~I \':Iriabk' may comain information abolll il." pre."l·nt
\·al ll ..:. Th i:-. inf<umatitJl) i:-. induck'd fil"l. I\ddili(IIl:11
,·;triable." :Ifl' tlK'n considered 10 sel' if till'), pro-vide fnrlhlo'f informal ion.
Aka ike·:-. final pn.·diclitlll c rl1)r (FI'EI i... u:-ed
10 dl"\t"rrmnc IIIl' appropri,l\l' lag k-ngth of holh
till' dcpendcnt \';tri;lhle:-. and Ihl' imk·I'lI.:lldl'nl
\'ariahk's," Tilt' FI'E ...lalblit' !Ul'aSllrc:-. ;1 rcgrc:-sion ':- flK',11l Sq\l;U'l' pJ"edi<:lion nrol". bgged ":11m· ... of IIll' depl·mk-nt ;Hl d imk:pelldt'nt "mi:th1t-s
arc indu{lt-d in a rq..tn.·:-... ion :I.' long a:-. their inclusion Ilmcr.- the FI>I':. FUl1her. if indu.,ion of a
\;lriahlc 1<1\\·l·r.- an l·qu:nilm·.. mean MllI;t l\" rr('(liction l'n'or. tli;1I \'ari"hk hdp:-. 10 pR'dicl till' der~'ndenl \·'Iriahle. T h ~· rdor<..·. Ihl' FPE .'t;nislic i:-.
al.sn L1st.'d In dclc nn inl' which indqwmlclll ':lfiahll'." h:IH' a GI~lngl'r c:lu ...:IIR·!ationship \\"illi
l':(I'h depl'mknl \·ariaht.:.
T;lhk I ).:1\ c:- the re:-'lIlb frolll Ihl' GI'.lIlgl·r
CllI:-;llily 1<..·:-.1:-- TIll' whle report ... IIIl' l()\\ ~':-I FPE
uhlaim:d frolll a r~·).:rl'!'.sion induding only bAAed
I:l llle." of each dqx'ndelll \ ari;lhk' :l1)(l lhl' lowesl
I'P E oill:linl'd from adding bAAl'" lal\ll'S of eadl
indqX'mknl ';IIi:lhk·. If indll... ion 0 1 :U1 indepl'ndcnl ';lrial)k' 11)\\"e", ;In l·qU;l1j()1l·.. FI'E. 11K' :Iddilion:11 ,':tri:lhle i:- :-;.a id 10 -Gr;l1lgcr-caLl.'l·~ IIIl'
Ec onomk Ncvit'w -Sc.· lllc mhcr

1m

dCI'lI.::ntlenl \·;\fi:t l)!t-. ~1.tll:ill;1 1 signifiGlnl't' 1c,'ds
for thl' 1........1 111;11 c:ll'h ,';t riahk d()(::-. not ;lid in prt',
dletin).: l.'conomi( ;Klh'ity :It"l. "Iso rqxJI1lxl. 1\
1l1lml'll.::r slll:Jlkr Ih:m 0.05 implies reil'clll)fl or Ihe
hnxllhe ... i... thaI ~'c<m(l1l1ic :Kl i " i l~' i... not Gran~er'
clust'd hy thl' \'ariahk ;11 Ihe 5-percl'1lI si~nil1clnc\:' le\'d ,
As Tahk' I :-110\\":-'. e;Kh inciqx.'ndent \":l riahle h; ..~ a p,\;'(li<.·ti,l· rl'1:Jliol1ship wilh im't'SIIllt!n1
and OUlptll. In l·'·<.....r Gise. 11K' FPE of Ihe t!qll:ltioll
t:lll, \\"1ll'1l Ihe indl'pl'nuelll ,'anabk' i:- indudt:d.
The st'curit}'-to-assl'1 1,llio has 11K' lowest FPE "·ilb
rt!spl'("\ 10 rl:al illl"l:sttlll'n1. Thus. this \'arillhlt' ha.~
I Ill' ."ll"ungl'."{ prl'(li<..·li\"(: n.:l:itionsbip w ilh irwestmen\. ~11. 10lal sc("u rit}' holdings. ::mel lol:!1 loan:-.
han..' 'ht" nexl IOWl!sl FPE.... Thl' slIh.'l·' Ftt!st:-. ;:!Iso
lIl(!i(,lll' Ih;11 each \"ariabk si~nilk,mtlr predk1s
J"l!0I1 in\·e...lllll·nl.
\Vilh fl:SPl'CI 10 1\.·;11 G~ P. Illl' sccli riIY-loassel r;l1io :lgain proelll cc", Ihc lowesl FPE. fo llowed hy lol;d loan.... The .~ ubscl FIl·st ... indicate
IlwI , \\'ith Ihe l'x('t'plion of M L allihe \';t riable:;In.' highl}" s ignifk:1Il1 in prl'(lk1Hlg re;11 G!'\P. ~ IJ
i:-- significanl al the 6.. pl·rc<..·nt 1cn'I-::1 findin~
nmsi.~It'nt \\ ilh iI., rl'bti"d~ hig h FIlE.The resu lt... presellll·d he re suggcst lhat Ih<..·
bank in).! Splt"Ill·... halance sl wel \':triable... contain
prl'dit"l i\·c infonll;l\ion fo r economic acti,·iIY .
Or p;utkular inleresl is Ihe ...i).!nificlIlce or the
:-'<..'t·llrit)"-It)-:ls.'iet r.llio. This rc1<l1ions h ip indiG.ltl!s
nol only Ih:1I lilt" alllc)lIll1 of cn.'tlil eXll'n<.il.'t1 h;:l:predit'lin: coIl1 ..... 1lI fo r Cl·onomit' growth bUI lhal
:ld ju:-lI1wnb in bank assel huldi n g~ afl' especially
iIllIXln;(nt in prNlkling en)\lomic ani\ itr.~

Because /lie 10(8110..111 sOfles txNOors on oo,ng nonsmll()tl·
ary I alscconduc/ed the causali/y 18S/S by us,n,;} /he growlh
r.1le oI/iIIs IWfI6S
FPE lot rea/lIlvcsrmen/ Increases 10
232 Tloe FPf /of real ou/puf becomes 8 71 lhus. rhe 519·
nrflCllflCe oIlOlai JoIIns If) predlc/lllg ffJ8/ 1flW]S/me(l/ challges
very hllle bel/lIS ~/.:ltlCe., Pl86crtng real CNlpuI falls

me

I a/so pcrtomltKl rl)6leSIS 'VI/h each oI/fIe VilfiilbleS III ,cal
/emlS Willi fC"SpcCr 10 fca/ItlVCS/motl/ inC FPEs 01 the

vilflabies cha/lge S/rflhtly bull/lelf marg'Il,11 SlQmilCance
k'vcis femaln /110 same The order 01 ptedlCl'Ye tmpOftilllce
01 1I>e v<lflllbics ,s ,)()/ alfcc/cd FOI rcal GNP tho FPC 01 1.42
liIl/s so Ie.'" M2 il.1S a shgh/Iy Iow6I FPF IIJl/I1 docs /he

,

Table 1

Bivariate Tests of Predictive Content for Investment
and Gross National Product, 1959:1-1989:4
RINV

RGNP

Number
FPE
>(

10'

MS

0'
lags

Number
FPE
>(

10'

o!

MS

lags

Lagged dependent
varIable

2.48

TL

2.22

.00

7.97

.00

LAR

234

.00

8.42

.01

rs

2.21

.00

831

01

SAR

1.97

00

7.69

.00

2

.."

238

01

8.63

06

3

..,2

2.20

.00

8.32

01

NOTE

2

8.76

•

RINV .. real gross invesunenl and RGNP real Of OM oallOO11l product
FPE .Ional predocbOfl error. and MS. fTIlI'9'nal SlQm'ocance level
C()l1lOl""08fCl3I batlk meastl'e5' TL .. IOla110305. I..AR. IoaMOaS$llI rabO. TS ..
total S8CUntoes. and SAR. S8CUllry"oasse! raloo 1.41 and 1.42 ale lhe mooelary
aggregales

Finding th,1I changt's in hank assel holdings
/lOIn' a pred,,'tin." rd:lIionship with 1"l':d e<:onoillic
act"'it)" is ('ollsistt'nl \\ ith Ihe ..;tory that hanks'
~·.. illingness to Icnd has :111 impa<:l on the re;:11
economy. BUI il is al.'>O po..,slhk thai hoth th ..:
mO\'cments ill asset holding.., and tht' movement..;
in 1.."('Onomlc a('lh'itr :lrt' lilt· result
chan~cs in
flnlls' \\lIJingnt's., to horm\\". If finns' d~m~lIld for
l"i"t""(lil WCI~ 10 fall. inn!slml:."nI :tntl t"{'onomic
growth would l1\ost likci~ Ix' anl."Cleti. Thus, WI.'

or

secufllY' /O'/lSSel ( /1/10 TO/a/loans
10 ptedK;1 faa l OUlpUl

6

In

reif/ /Of/TIS do ,10/ help

cannot say dl..'finlll\"(.'ly Il10u mO\"(.'lllCn(:-. in I..'CO!lomi<.· at'li\"iIY 0(,"(.1.'" hCGILI.'>(.' of;, (·h:lIlJ.:c In
hank!'>' \\"illlllJ.:nes... 10 Il..'nd. Bul \,"t' C:1Il <:onl"ludl..'
Ih,,1 changc!'> in tht, comlXlSition of hank as.'>CL"
lend to prcn'dt· ch"ngc!'> in <:l'utlomi(' ,It·th·ity.
Intc('(.'St rates a nd the com position
o r bank portro lios
A(."(:()rdin~ 10 Ihe c redil r..!tinning ..,tory pre,
'\(.'1111..-'(1 hy Sti,IJ.lilz and \\ ·ei.~ .~. hanks heenlllt' k's."
\\'illing 10 Il:."lld ;IS nl;lrkL'l intl:."rcsl I:lll'S ris ...•. Ikyond sOllie J"loil1l. Ihen. market inlcn.::sl rJIt's ;1Ilt!
11ll' qll.mln}' of ]o:lns I..'xI(:ndl..'d should he ;11"crsci}" rd:llt'd. Flll1hel". as 111ark!..'\ illtt'n:st rale."

1'...'(lel'lll Resc",t' lbnk of Dallas

Chart 2

Newly Issued Commercial and Industrial Loans and the Real Interest Rate
C&11oans

Intents! rate

.

Percem

P.roenlag.-poWII dIange

"
RallO 01 new1y ISSUed ell
loans to total Ca.lloanl

"

3

,

•
•

4

v

o

-,

•

,
Interesl rat'
(0ne-1H' TfH$Ury not. rate)

o
SOURCE OF PRIMARY OATA Board 01 GovefrKll'S, Federal AesefVB SysIBm .

rise, loan 1,Iles :tre hrpolhesizcd to riS\..' less r.IPid l)" n:U"luwing Ihe spread bt:lween loan I~Hes and
market r.ut:! .... 11)(.- qUllntit), of In:lns issued amJ the
spre:ld helw(.'Cn IOlln rates :tntl market rates
should. lhercfon:. be dirt."Clly relaled.
Similar rdationship!> bt'lweL'n mO\'Clllents in
intcl't~,"1 r.lles lind I1lO\·t:!Illt'nl.. in credit could also
arise from changes in Io:tn demand. If firms
shiftt"{1 ;m"l}' from b:tnk Ix)rrowing and to\\..lfd
hond is."u:mct.', lo:tn r.JIl::-. would f;111 and hond
r.lte... would rise, pfOduc:in~ a positi\'(' relationship
tx:twec;.. n l(Jans issuLxl :lnd Ihe spn.-;Id helween
10;10 and markL'1 mtt'.... 111l1s, :10 examination of
10;10 and inll.:rcst mit: data .....ill. ,II hest. pron:.' 10
lx' (.'onSl:-.tent with (he l'I't.'dit r.ltioning h~,pothes i.s.
Credit demand would :Ito,,() ha\'l: 10 bc al'counled
for 10 prmc. ddlniti\'elr, that cn:dil mtionin~
(X'L'l1t':'>.
I'.conomlc Rcvlcw_Scplcmbcr 1990

'1111:' relmiol1ships betwcen interest !':.lIes and
10;1OS t!xit!ndt!d ;Irt! l'C"crM:d if 11I00'eml:'nl.. in the
quantity of credit ;w;: principally the resllit of supply sh(X'ks, :1." ar~ued hy (kl'l1anke :md Blinder.
'Ihal is. markt:!t interest rates and loans extended
should he po..'iiti\·dy rdated, wllilt! the spread
:-.hould he in\'Crsdy rdatL'u to 1(Klns. This section
considers thl' ""Iidity of these ;.rgllmenls hy
examining loan ;md intcn:st r.He data.
Sinct.' 1977, the Feder.ll Resen:e h:t.. coltt:l1t."(1 sun:e)' d:II:1. qual1erly. on ne",'lr issued
commercial and indu:-.trial (C&I) loans. While the
sUI"e}' only l'O\'ers one cdtegory of lo:ms--C&I
luan:.-thi'i e;l!L'gory makes lip roughly one-third
of all hank lelldinA and almost all lending to husiIlL·Ssc..'S. ell'II'! ? pn.'St:nt.s the relation ... hip between
IlL'","I\' is... ued c..'(d loans <IS a percenlaAc of total
c.....l.;;] 10ao:-. and the change in m:lrket inlercst r<iles.

Chart 3

Newly Issued Commercial and Industrial Loans and the Interest Rate Spread
IntentS! rate spi'ead
Pe«:entage-polnl change

•

"
RaliO 01 newly iSsued C&t
loans 10 10tal Cat Ioan$

"

•
2

•

o

•

Imarest 111& spread
(SllolHarm C&lloan latl less
OI'II-year Treasury noll fate)

•
2

o
SOURCE Of PRIMARY OATA_ soard 01 Governors, Fedefal Reserve System

The t'e:l l on\.'-ye:u· {".S Tre:l~urr nOlL' r:ttt' i~ Lt~L·d
:l.~ tht' inlere.'>! ,·:111,: 1l1t:':tSltrt\ TIl<: rl·al ..ti t· is ll.<;cd
Il<:~ I)(:nllls,,: it 1'I.:prt:'!'tt.:nb thl' I~Hl· nf rt·l lI ril 10
nt'dil lx-yond I hal which Illt'l'dy cOln lx'ns:nl'~ fo r
inflation. And I)(:(':mst" nl'wly is.<;l1l"'(1 lo:uh. less an
adlllstnK'n\ for expired 1<'>:11"", rqwt'.'i(.'nt ti ll,.'
('h:1nW,: in tot.- I 10:lns outstand inJ,:, for consistt..'m:y
thc n~'ll inll..'rL'.~1 I;llc i,... lI.~'(1 in fi rsl -di ffel\" !lt'L'

fo rm.
A~ thl' t'h:l11 sho\\~, tht'rc i~ nol an oh\'iou',.
rc];tti(ln~hir.

,wo

rosll i\'t' or nqpti\'c, 1X'1\\'(.'Cn I hl'

~rie .... Compllting Ihl' t'Orrcl:ltioll IX'tWCl'll

m.:\\'ly is....u(.'(l lo:lns :md thl· d,.lIlgt· in tll\: f(.,:tl
inl l'rc .... t roUt' nmllrm_... tltl.' lad; (If a rc!alion,...hip
1ll'1\\l'l.'n 111<:111,

Ir 1\\0 st.'rh.:,

111()\"I.'d

kknticallr,

thl'), would ha\"(:~ :1 ('orrl.:i:ttioll of 1,0 . I f IlIl.'ir
mO\'t'tlleniS wert' cOlll pletdy lI nn..'latcd. Iher
wou ld lI:l\'l· :t Zl·tll t.'orrdation On'r ti ll' 19'7_H<)

•

Ix'riod , Ill'\\'ly isslied loa!),... lIa\'1.' a neg:lli\'e hul
nol significant ('OITc iat iol1 \\ ilh (' hal1~e:- in the real
JIl\l.'rcSI r:lIl·.
U\.T:llISC or the llpw:t r<l Inmd in ,h\.· 10:111
,... l'rie .... dllrin~ 19HO and 19H1. 1 ;11.,,) t"otn pllll'd tht·
corrd;nion c.:oefficil·nl for ,IK'Sl' 1\\'0 sl·rit: .... IX'ginnin~ wilh 19H2. For 19H2-H9, newly is,... ul·d 1(J;tn~
;md Ihl.· dl:mgl· in thl' real inl l'resl 1~lle. 1:lgg\.'d
one quanl'f. h:u,\.,;t si~nifi(;tnl l"lxn.'I:lIion o r
-O"OW. 11,i ... fil,d ing Sllrp()n~ lhe ("Il.'dit r.tliollll1g
hrrollh.:si:-,
Chan ;\ plot .... nc\\ Ir is.'illl·d c....(;] loan:-. a .... a
p<.'ro.:nl;tg(.' of total <:'..'<:1 IO;ln... and ,hl' ('hall).!e in
th .... sprI.·:ld IX:I\\ l'\.'n tilt> inlCre:-.t 1~lrl.' Oil sl1on-t(.'n11
G..'-::1 loan.... (Io:tn:-. w ilh Ill:llllnir of 011(' ye:lr Of
11.::-...... ) :md tlw onC-},l'"'' Trea~lIry notl.' r:tll' Agalll,
hl,'(·;lllSl,.' ne\\ly bsu(.'(1 lo:tn:-. rqlt"cSl'n l Ih(.' ('h:mg....
it) lotal out"t:mding I O:II1~, tIll' fir:-;t dill"t'1"ence of

Ihl.: :,pfl'ad I:. rn.·:'l;'ntl"t1 in till" ch:m 10 Ill' nlll:.i...·
Il'111 A:. \\a .... lhl· <":I.~l· in ell:!!t 2. Ihe I\Yo :o.l·riL·:o. du
ntH :tppear 10 l'xhibil much of:1 rd:lliolhil i p. Tlw
corrdatioll codlkiL'nl indil'atl· ... Ihal for IY---HI).

Ihl' 1\\ 0 "l'l";l':' han' ;t nl',g:ni\ l' hUI nol si,gnilk:ulI
rdallon:o.hip. !luI for 11)l'I2-H<.). Illl' ne,g:llin' l"orreblion IX·I\\"I,.·\,:n lilt' I\H ) :'I:ril,.·s i... :o.i,gnillc:lnl. The
Ili,gIlL':'1 and Int)...' :o.ignificanl l'fwrl,.·l:ili(lIl 1)O,:nrr...
\\ hl.:n lilt' :o.pn:at! \·:Iriabk· i .~ bj.(~I,.·d 1\\0 qu:uter:o.:
Ihl' ("(Jrrl'la,ion i... -fl, II al a :o.ignilk:lIl('I,.· iL'\'d of
i Ix-rel'nl
Thl' Ill.·g:ttin· fd:llionship 1X:l\n'el1 nl;.'wiy
i...:o.tll.·d loallS and 1111.' ('hangl' ill Ihl' inl('rl',sl 1:111,.'

:.pn.:ad runs COlIllII.·r
h~polhl.·:.izl'l.l h~ '

10 Ihl' t"l"l' (I(1 I:llionillg ... tory
Sliglif;.o :md \X ·n ....s. Blil Illi ... rcb·

liunship i... l.'OI1S;Sll'l1l \\ illl 11K' nollon of nl,.·dil
supply :.lIo{'[...... :md ilHJx'rfecl sUb:.llllllioll:l:o. tli.... •
I.·u .......t·d In- Jkrn:lnkl· and nlinder. In l"Ollll: I:o.1. Ihl.·
nq.::lI1\·l· feialillll:o.ilip hl,.·I\\'I,.·l'l1 nl.'\\ Iy i:o.:o.lll.·d 11':111:0.
:1I1d I he cli;lllgl.· in Ille rl':I I (nll·1"l':.1 1:lle I:' ('ollsb·
lenl \\ ilh L"l"l·tlil I:llioning (Thi... 1.llIn rdalion:.hip
i... al....o nm:o.;sll·nl \\illl :.l1ifb in 11K' dell1and (or
h ank loan.s ) Thus. III\' dal;1 L'x:ulltlled Iwr(' arc
in('onl'ilhi\l' in Ch;tl:ll·ll·lizinj.: hank 1)(,.'h:I\·il"'''

Terms of bank lending
over the bus iness cycle
lksid,...':. tknyil1~ 10;ll1s 10 nl ...lollll·r.... hallk:o.
1:llil,n ~'rl'dil ill (),Ill'r ks........l·\1;'1"1: \\';I~'"
t;fL'l'll\\ald .Ind Slij.(lill (IW';-) Ilolt..' Illal during
111:1\'

r)(':li<xh of Ij~llI t·lvdll. t'n'n for I1r1l1s Ih:11 dn oh·
f;lin 10;11,.... (Tedil 1l1,1~' Ill' .~()me\\ h:ll rl·stI'KI\·d. FOI"
t·,\:II11pk-. hank ... Illay 1II... iSI on ... hor\l'r m:,lurilie:.
for IIlL' loan ... tl1\'\' 1.o;MII,.'. and II1\' .~ile of 11ll' loans
Ihl'Y is....Ul· 1l1.ly fall An innl·,I....(· jn Ihl,.· Pl·fCl·nl:1)..:l·
elf" IXlilk 1c):IIl~ Inadl' UlltiL'r I(Jall nl!\l111illlll,.·nl
a/-!fI.'L·IIll'nt:o. IHay abo n.:tk·t1 liJ.!hIL" ("1'L"tlil ",';lIldard:..
lI ndl'l :.udl .m arr.lI1gl'lI1l·nl. a hank [l1'(11ll1~\'S to
is... lIl· :1 horro\\"\'r :1 loan lip 10 ;1Il ,1grl'cd-upon
,l!llOUnl a:o. Ion)..: :.... Ill\' ho)"n)\\l'r ...;lli:o.fie ... lilt, {l'nl'"
of tlw t"OIlI r.ltl Ikclll:o.\· l~ 'li()llin).! of 10,111:< (';1Il
Olll\" ,t!ft'l"\ finn . . 111;11 do nol h:1\ I;' slich ;1)..:1"1.'t·llK'rll:.. the pL'rt'e,-,nr;lge ot lol:1l loan:o. lI1adL' lIndl'1
COll11l1illlWnh ... !lould il1t'I"I.·:I';t' ( hlrlll~ pt'rilM.I:o. 01
light nedil
TIll' FI,.·del~lll~l·sl,.·I"\l'·:o. qU:lrll'rly MII"\"t'~ Oil
t'olllllll.'r(·i:l1 :Illd IIl(Ju ...II·i;i1 loan... indulie:o. d:II:1 Oil
lilt' II.·rlno; lindt" whid) loan ... ;II"\' j ...:o.lIL'd [)al" :lft·
t'olkt"ll'(1 Oil thl' tlllmlll'r o( ... hort and long-Il'fIll
F.cnnumic Ill'vi('''' - Se(Jtemher 1\),)0

C .."I loans is:o.llt:d. Ihdr ,I\"l.·I:lgl,.· ... i7.1,.·. ;1\'l'l:lgL'
malum)", :Ind Ihl' pt.·rcl·nlagl· of ('....'\:1 IO;lIl:o. 1I1:ldl'
llndt'r t'I)lllnlilllll'IlI ,'" 'I'llb SI,.·(·lil)l1 rrL':o.L·nb rl·WL' ....·
:o.iol1 1"1.·...11h:o. \\ ';11t fl';" G"\I' ;lnt! ~':Idl :o.L'riL'S to dl··
Il'flllll1l' 1111.' I,.·XII,.·nl 10 \\ hld1 IhL' Il·11l1:o. of hank
n\.'dil \':IlY on'r IhL' htl.~illl· ........ cydl',
A:. \\'ilh Iht' prt·\ iull... empiri t~lt \\"()I-k. hc.:fore
eSli1l1.l1Ion of Ihl' l"tlu;lIions. Ihl' ."L'rie:-< ;11\: l '.'I;;lIlIint·(] for sl;lliollarilY " " 1111 Ihl' l·Xt·l·plion of fhl'
;1\l'I~lgl,.' malufilY on short·ll,.·rlll loan..... each seril':o.
i:o. found 10 Ix' sl<ltionary ill ils gl'O\\"Ih 1:lIl·. Thl;'
<klrl'n<kd grO\\,th ralt· of Ihl' maturity \·ari:lhlt: b
lilt' applllpri;lll' .~pc.:cilk;llioll for IlIi:o. SL'fil.:.s.
TahlL' 1 pre:'l'nh Ill<;' I"<.·~rl· ...:o.i()n n,:suhs . A:o.
Ihl' 1;lhk' :.lIo\\'s, IWO of 11ll' fOllr \ 'anahles 11;1\'t'
Ill\' h~T)Olhl·:o.il.t'd l"L·lalion:.hip w ilh feal olllplil.
,.111,.' I:llio of :o.hOI1 -ll·nll ('....'\: 1 loan:. 10 101:tI nL'\\· I~·
is.slll,.·d r . .-.:. I 10;111:0.. i:Jggt'<1 (Jilt' quallt·r. 11;.s a ...igllifi~';l111 neg:II ;\'l' rdalion,~hip \\,i,11 re;1 1 OlllpUl.
SUdl ;I fl·l:tlioll.~bip b COIl,s blt'lll \\ itb till' hypol1ll'·
.si:o.lhal h;lnk~ 1"l·.s nicl n'l'dil hy issuing ftc"\\L'r long·
Il'l"1n loans and Illal Ihi:. fL'slliclioll lIa.... :1 nq.t:tti\·t'
illlpal'l Oil l'('OIlOIl1it" ;lc1i\"ilY.
Thl' pt..·l"l"l·l1t:lgl· of c..'\:J loan.... llIau\:.· lImlt-r
("(lInmillnl'nl ;ll~) h;I,~:1 "'Ignillt'~tnl nt·j.t;uin· fda liol1:o.hip \\'ilh 11:;1 1 oulpUl. ,,'lIl'n IIn ns wilhoul
1();ln t'I)llllllillllt..'nl agrl,.'l·mt·nl :o. 111)ld ;1 sm:lliL' ..
r. . .:R·cOl:lj.{\· of nl'\\" loan:o.. OUIJluI i:. Ilegath'cly
;l lk('I~'(1. Thi:o. finding ."llJ-Wesb Ih:1I t:'l'OIlOIllK ac·
li\·i,,·;:o. hUll \\ hl'o firnl:o. arl' unahle Of u llwi ll ing 10
l)t)m)\\' \X'llile di.slingui:.lung 1")(:I\\L'l'n ahililY and
\\ illingnl"":' ;:0. IlOI po........ ihk ill 1111:' analy:.i.... ,hl'
!"L's]lh is;1I it-;Isl c(lnsi.~lt·ll t \\ jlh 11ll' nOlion Ilial
l't"011011llC :1("li\'iI\' i.... hurt \\ Ill'" h: l nk.~ restrict
cn.'dil.
TIll' otllt'r I\\"() :o.elic:. t'x;ullilll'(l do nol I.'Xhillil tlK' hytJolbesizt'd rd:llion.ship. ShoI1 -lel'l1l
('.,..-':'1 loan... ("Olblilll\t' l'IO J"X.TCt·l1( of nt·\\ c..-.:.[ lo:tns
i.'Nll'd . hul lhdr ;1\1,.·r.lgl· ~iZl' h...... :1 signifiL';ult

1.!1:so cxiWllIfICrl lhe Ie/.JI>Ons/ltp /)eMccn the {]lOW", , ale 01
IOlal ()"'S/.'IIJ(lm9 C&llOdns find /he rt1lcresl I<1le

var,ables

l ilt' COIIc/.lI01 bel.·1C8 0 the g (OM'111 (iJle 01 C&l loans iJnd

1M CI1,,111QO . ) I~ (ealll1lCfcsl (ate 101 1917-89 IS
Sil}IlI/ICRIlI at /h(' 9·petc;en11evel
110/1 IS 0

For

0 25

1982 89 mecOffOO'

JO sIgllll>C:IIll;'l1 1110 3' /X'fc0 11 k!vcI The spread

varmUle IS 1101 SJ{I"'/'C.ll1lly comw tl8d wll/1 1110 grOWl" 01
OUlsllllldlll{j /(. ,...,s HI 0 1111& paoot;l
$J 1()t1·lffl m Iodns ,110 Io<rns Wllh (I m8lu,,/y 01 up IOone ye,"

•

Table 2

Gross National Product and Terms
of Bank Lending, 19n:1-1989:4
Independent variables

RSTTL

Constant

RGNP...,

.005

(2.88)

.005

.008
(3.60)

.309

.277
(1.93)

(1.03)

(-1.15)

-.045
(-2.34)

(.29)

-.002
(-. 12)

- .099
(-2.07)

- .027
(-1.21)

- .026
(-2.55)

.013
(1.02)

006

-.043
(-2.03)

-.032
(-2.88)

.01 5
(1.15)

-.015
(-.76)

-.010
(-1.00)

.017
(1 .37)

(.12)

/-3

AMSTL

(3.46)

-.048

/- 2

.006

ASSn

(2.77)

(2.08)

/-1

LUG

.050
(1 .20)

168

003

.275
(1.75)

Breuscll-Godfrey
statistic

.29

.8'

.94

.96

R'

.16

.15

.22

.07

NOTE: C&lloan measuI~: RSm .. raliO 01 ~I)' issued shost·lerm loans 10 lotal
newly issued loans. LUC .. ptlfcenlage 01 newly issued loans made unclef
commitment. ASSTL .. avarage size of short·telm loans. and AMSTL ..
average malunly of short·tefm loans
RGNP .. f9aJ gloss nali0l\81 product. the dependent Ya"abIe.
Figures in pal&rltheS8!; ale I statrstics .

negati\"e. rather th;\I1 positin·. relationship w ith
output. This result runs counter to the idea Ih;ll if
banks reslrict nedit by issuing smaller loans. Ihe
economy is ad\'erseJy affected. finlillr, Ihe ;tn:rage maturity of short-term G..'<.-:I loan:-. has no significant relation.ship with G!'JP. Thus. ;t lthough till'
percentage of shOtt-term loan!> relatiyt' to longterm loans seems to matter for economic ;1<.·t i\"ltr.
the ;tH'rage maturity wilhit1 the class of sholt-term
10

In;ms does not appear 10 he relevant.
In .~llm. the ratio of newl}" issued sholt-tenn
loans to tOlal ('ommerci,,1 and industrial loans
;lppe<lrS to reflect the Stiglitz and Weiss credit
r.ltioning storr. as does tile number of C&I loans
issued under commitment. But for 1977-89. the
dat;t on ,I\'erdge size and a\'el"aRe malllrit}' do not
sLl~eSI a relationship between nedi! and economic acti\·ity.
Federal RCRrvt' 8;lnk or Dallas

Table 3

Relationship Between Equity and Assets
of Commercial Banking System, 1959-89

n

SAR
Number

Numbel

FPE
)( 10l

Lagged dependent variable

1.8

EqUlly 01commercial banks

,7

MS

10

lags

0'

)( 10l

2

3.8

2

36

MS

',1.:1 of dala 10 c\'altlall,: eonn'rn~ the
hl..'I\\I..·cn l'qtlily and Icndrng In Ihl,."
h;ulking ~ ..:nor. lkrn:ulkc :tnd (;L'1111'r noll 111:11
Ihl' hL·;thh oj" Ihl' IMn]..ing ~I,.'( I Of pby:-. a roil..- in
11K' d~'I~omlitl: l lion oj" h:tnk n ."~1'1 h(Jlding~. To IloSI
lhi.~ hypol llt'... i.... I \"';;lIll ;llI..· llll' (~r:lng~'r clus;iI
n:bu0I1:-.hip 1'1...·1\\·1..·\·11 till' I,.·quilY 0[" lit ..' "·fJ11l1l1~'H"LII
h;ulhing S~.'I\·111 .lntl I\\() hank hal;llKI..· sh~'I..·1
lU...·:I:'>Ul'..·:'>. IIIl' ",\·(·urit\·-l o -aS:-.l·t '~lli() :lIld tOl al
loan .. II Tltl.."I..· IWO \·;lri:lhl .. ·:-. ;lH' u .. I,.·d hl'n.: heCIU:,> .. • Ih ..·y \\ ..on.: found 10 h;\\'\O thv mo...1 'iiglli1'i('ant rd;llion .. hip.... wilh fl'a) l,.'(·tJilomic :ll'IidIY
BtX:HIM." 1 \\:l~ only ahll' 10 ohlain annual
d;tI:1 on "xIUil\. IIIl' hank halan('(' :'>hl'..1 IWo:asurt':-.
:tn.' Ir.ln,rontll'd mIll :Ulllll,tl .' il'ril':'> I'UI1htT. (0
;l\oid:1 ('U1Tt'!;tlion dlll..· 10 int1alion. 111l' I..·qllil~ :Ind
101:,1 JO;lIl 'oni", ... lfl' ddl:lled h~' lh..· lixnl-\\\,:ighl
(;'\'1' pri('I..· ddblol lltl.: pron'dllfl' 1:-. Ihen kiL'nli (~ 1) III Ihal lollo\\l'd "':Irli("r. Fir~1. 'h.... IhR'1' .'o..:nLO~
afe I..'X;llllilwd fo .... 1;lIioll.lril\ \::1<"111'0 !ound 10 Ix'
.'otatlOn:lr~ III it-. ).tl'o\\IIl r.ltt '1110..' numh!.'r 01
laggl..·d dl'pt:l1dlotll \ ari:lbk~ III ind miL' III l'adl
n_'gn's," loll I' tlll'll lk'IL'rmilllod h~ th ... FI'E ClItt"ri,1
Thl,.·

la~1

r't"l:ilj()n~llIp

O

O

lags

2
09

NOTE TL. IOta! loans Issued by COfT'I018<CJat banks, and SAR _ socu1lty·\O·asset .abO
commercial banks
FPE _Imat predic~on eHOf. and MS _ ma.gmal S'9noticance level,

Equity and bank le nding

0'

FPE

ot

Fi n:II1~. IIlI' ImiL']x'miL'nl \"ari'lhk'. equ ity. i:'> add('d
10 each "q..tn·:-'~Ion . ;Illd tlll..° ft:.' lIltant FPE i:'>
cll('lIi;lll'd
TIll' rL':'>lIIt, :Il't.: prl..°:-'I..·nll'd in T:lhk:~ \X'Ill'n
b).:.'o of only 11K' dl..,pt·mkm \:Ifi: l hk~ ;In: indlldt:d.
11K' 10\\"(',"1 FI'E~ an' ohlailll..·d wilh 1\\'0 bg~ of 11K"
sel"llrily-lo-:1 ....,I..·1 l';lI io ;lIld 1\\ () 1;1).t~ of 101.,1 IO;IIl~"
Indudin).: IIlL' loquity :writos 10\\·l·l":-. 11ll' FPE
I..·aeh
l'qU:l1iot) fUrlh!.'r. TIll' mafginal sj).:llilk:11KI..' k\t: b
or thl.' Flo.:."I." for l hl' ..·<]ulIy 'I..oric:'> :Irt: 9 pne...'nl
;lnd I () IX'fel·nl. 1"e:'»ll't'li\ d~ ·. 'I·hll~. II'l' \.\ jell·nl'l..·
pn)\idl'~ \\(':1].. support for I hI..' Ilotion Ih:11 l1lOH'Jll(,,11[~ in ,,'qllilY or Ihl' h:tnkillf,: :-.y:-.IL·tll prl..·cL·d",
dl:1n).:l'.~ in h:lnk a:'>~~'1 holdillf,::-'

or

Ttl(> 1,,'1X111}6Slrod IciallOflShp OCI_' #!qUIry snd tl.Jr'"
1eo1Cfp'O IS ()dsccl OH I/Il' m.:l,~el VilItJ6' 01 belt». equrl) &A
Olilit I¥C QfVy ,'''''''''1b1l' on the booI< ....1/uc 01 CQUlly A shocl<

10 Iffl> ,....'/k('/ vi1Vc 01 tX/UII'I .wuch "I/eels bank lendIng
IngIll tX' I1ar.tI,xI 01 Il()/ 1fPP<1ICtli Hl lilt:' book vahle 5;(>(teS
Thc!cf(}fC 1116 U$O 01 book VillIii!' d,11.l Clo?11("; a SllN>gel!1
II)Sllflt the £>q!uly IeI!dHlg rclml(Jl'sl~

~·"II''<I.I'' '1"'~1I

:,., .':.s:.U 1'1.1:'1).",1

"

U! "'\lI;oUI ;).\()lU .{IJLlns l!f).").!.) JO ;).")Ul:~1{KIUI! :'lIp
p.ll11I~J.II!.\\ ... , .\tUOllO.l,) [I: ...... ')\11 PUI! .I(JI \1:l['~1 }jU I!q

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uo!snpuo:)

Appendix
Sources of Banking and Interest Rate Data
Data used for the first set of causality
tests are quarterly, seasonally adjusted, for
the period t959 :1- 1989:4. Real investment
(RINV) and real gross national product (RGNP)
are from the national income and product
accounts (U.S. Department at Commerce).
Total loans (TL) are total loans issued by
commercial banks . Total securities (TS) are
total securities held by commercial banks.
LAR and SAR are, respectively. total loans
and total securities divided by tolal assets of
commercial banks . with total assets being the
sum at total loans and total securities. Data for
1959:1-1970:4 are from Banking and Monetary Statistics, 1941-1970 (Federal Reserve
Board), table 1.4. Data for 1971 :1-1972:4 are
from the Annual Statistical Digest, 1970-1979
(Federal Reserve Board) , table 15. Data for
1973:1-1989:4 can be obtained from the Diges', the Federal Reserve Bulletin, or the
Citibase data bank. The monetary aggregates, Ml and M2. are quarterly averages at
monthly data from the Federal Reserve Board
data bank .
The real interest rate variable used in
computing the correlations is the one-year
U.S. Treasury note rale, adjusted for inflation
by the consumer price index . The interest rate

h :Ollomk Itl'vlcw -

SqJlcmbcr 1990

spread variable is the short-term commercial
and industrial loan rate less the one-year
Treasury note rate. The Treasury note rate
data are quarterly averages of monthly data
from the Federal Reserve Board data bank.
The consumer price index is from the Citibase data bank. and the short-term C&l loan
rate is from Federal Reserve survey data, as
published in Business Conditions Digest
(Commerce Department) . The data for
1959:1- 1988:4 are from the September 1989
issue. The data for 1989:1-1989:4 are from
the March 1990 issue.
The data on lerms 01 bank lending are
quarterly for the period 1977:1-1989:4 and
are from the Federal Reserve Survey of Terms
of Bank Lending . The data are from various
issues of the Federal Reserve Bulletin.
Data used for the second set of causality tests are annual for the period 1959-89.
Total loans (TL) and the ratio of tolal securities to total assets (SAR) are fourth-quarter
figures from the quarterly data described
above. The equity series is the fourth-quarter
figure from the quarterly Consolidated Reports
of Condition and Income for commercial banks.
The data are from the Federal Reserve Board
data bank.

"

References
Ak:likl'. IIirOlugu ( 19<">1. "Fillin):: AlIlon·gr...·:-..,... in:
~ I odd~ fill' I'f...·diclion : A I/I/(/I.~ (if ,il{' II/srilllie
(~rSI(/Ii.~flc(J1 .Ualbell/alit·s ] I: 1 I.'\- 1-.

- - - (!(rlil. "SI:Ublicd Prl·dil'[(Jr

(;unthlT. Jl'fli:ry \\ I Il)H9J. 'j'e.w/s /lallNllp, COIf(Iifillll,\' .1/(lIwt-:l'l'ial I '('/'SI/,\' /;'c:(lI/I}/uic FlI("/III"Y..
Fil):ln('ial Indu~lt'\' Stmlil·~. Fl'lk-r~ll IkM:f\l'
Ibnk 01 1);llb:-- ,f)alla.~. Ol1oh(:rl.

l(k·n'iril~l1i()n."

A III/uis (!/'Ibe IlIslill/le' f~f SllIlislical .1It1lhellJolit's 21: 10:\- 1 ~.
Ikrnank ..... lkn S. (1I)H6). "Altl'rn:lti\'l' r X pbll ;lli()ll~
o f llll' :\ l o n...·}'-l m·Ollll· CorrdatiOIl.- Car//('I!, ie-Ror.:bes/el· CeJ/!/elt'lItC' Sedc's (III 1'lIhll,
Polie)' 2'i: 19-99.

(;UI11:1.

l ld:l~':lI)

- - - . and - - - (19H<)I. "Till' Fl·(k-r.tl FUlld~
({atl' and the Ch:mnl'b of ,\ IOlll'I,lry Tr.m~mi's­
'sion" (Pri IKctO)) llni\·crsih. Fl'Ilftlal'\·. PhOl0(·opy).
- - - . :111<1 i\lark GCI1k-r' !e)H-I. - lbnkin).: :lIld
~ I ano(;'l'Onomll Eqllilihriull1.- in .\('1(' .4/Jpl'{)(/{:bc'!i Iv .lIfJII('I(JIY /i·ollf,mics. \.'<1 \\'i llblll
A. Barnt'll :111d I\cl1IK'th,l. Singll.'IOIl ''\t'\\York: C.:lmhrid).:...· !lnin'rsilY I'r(·,S.... I. H9--J 11.

"Sll1all-[llI.~illl·"'S B{)rTO\\l'r~

h:ing. Slq11tt'n It (II)K(\). ·1>. 1 ()n(·I:\ f~' 'I'r:lnsillissioll:
Through B:mk I,(WIS or Ilanl\ Li:lhililil:s''.Iml/·I/(" (!{.IIIJ1JeI'. 01'(111. (Jlld /JUIINllg IX

(AuguSI ):

- - - . :md J\!:t ll S. Blil)dl'r' 19M). "Crl'tlit.
i\ronl·~. :1I1d Aggrl'1.::It ..., I kllland. ~ ,1111('1'1(;(11/
1:i.:(!l/olI//(.' N('!'i('/(' -X '~I:I~·. I'apl'r.... and Pro·
l 'l·i,:di llg..... 19!C): -l:l~.W .

(l'IXI).

Art· Fn·lill).: Ct.....dil Sqlll'\:,Zl': II '(/11 ,1111\'('1./01/1"
Iwl. ~1:lrdl ), St)ull\\\'l·.~t t·<liti(lIl. I~I. lQ

21)(1-:~O.""

I.own. elCI S (It)HH). "Thl' CI'(·dit-OUIPtil l.ink \ '~.
till' !\10IllT- OUIPUI [.illk: '\'l.'\\ I':\·id ...·n .......·: F...·d·
l'l':d Ik':<l'I'\l' B:lI1k 01 f):llla~ I:('(,I/Hlllic NC'/ 'ie'll',
'\101 l·mlx·l'. \ - \(I

- - - . and Donald \\" 11:i\'l·.~ t le)l)OJ. ~'\Il{)IIll'r
1.001- :11 Ih ...· Cn.'dil- OtilPlIl I.illk.~ I'L'lk-I~lllk­
...1:1'\ ... ' B:1I1k of Dalh~ lk~I::lrdl 1':llx'r no. (XIO 1
tD:l1h.... January).
S;t1011l01l Ilrolh ...·I'... (1 1J'X)1.
1>.1;)\ 2'i. 1-2
Sti~ l i l z .

.Io.......·ph

(.flll/lllelt'S

(III Ot'lfif.

E. and Andn.:\\' \'.; ...... ~ ..; t 19X]).

~Cfl'di' H:ltH)nill~ in ~I:trkl·t.~ willt Imll1.:rkn

Chlir. l(uhcl1 T. (19Ht)). "Crl'd il Short:I/-:l' SI()\\'~
'I'l·:.;:1 .... Ul.'l·O\'l·ry." '/1)(' SWllhll'('sl 1:·C(lI/OIIII·.
h.x!o..-r:d Ik~~r\'l' Bank of ();tlla~ . .f:lI1uar\,. 1- -l

Gl:rtr...·r. r. lark (P)HHI.

~ FiIl;lIldal

SI1'lIl'tUR' ;tnd
A~rcg:l(c E('(lIlolni(' !\l'li\·ity." ./u/l/'/wl I!f
.\I(JII(~ )'.

2 I:

Cit·"".

£l1I(11)ClII/.!iIl.f!. 10 (AlI).:lIst. pI

"')'.HiX

VI'l.'l·Il\\:dd. llnll'~·. ,tnt! .I(J.~(:ph E Sliglill ( 19H- J.
"1\I(Jnl·Y. Impo..:rk(·1 Info1'1n;l(Joll :111<1 F('onomll'
Fll1l·ILI;lljon~ . :\BEn \\'ell-king P:IPl'r !-on""·:--.
n() 11HH (CunI1fidg\·. ~1:1"""'.: :\alillllal BlIrl'ali
of Enmoll1il' lk ~l·:1f\·h. ~\;U'(-Itl

I,

! n form;!( ion. "

,'11111'1'/('1111 fe(ll/oll/ i(' N('/'i('1I' -

1

'.llIm· ): 59. . . - 11 0
"S Ihlrl'<lU of tIll' Cl'nSl1~' I()I)OI. fJlI(II'/(-,I~I' Filla IIdal /«(1 xII'I.F /I' .1/m II !j(J( III rill).!.. .11iII i JIg
al/(I";'(I(I(' COll}(,mfioJls. FOllrth l)lWfllT ]9H9.
Sl·ril·... QFR-~9-QI n'\·:I~hingt()n. D .C: (;01'-

l'rnnK'nt I'rillling Ollle..... April I.

\\ ·ooll. J.H (11)-'»). (:OIl/IIII'Il /(/11/(1111.' /'Olll/tlll"
111I'['SII//('l/llIebo/'iul/l"UlIld(lIl: John \'.;·i!...T &.
SOIl:--)

" ...,<lcmll!cl'l·I'VC n,,,,k of

D"I1,,~

Robert T, Clair
Semor Economist
Federal Reserve Bank 01 Dallas

Performance of Eleventh District Banks in 1989:
Progress but not Profits
Oll1IlH.'r<.:i:11 bank:- in (he Ele\Tntll Ft:dt:r.ll He·
M,'lye f)L..tritl ~iJ.tnilk';.Ultl)' ft'dUCt'd thc:'ir losse...
in 19H9. 1 E\'t:n though the impfone'mCn[ W:lS suh·
:.tanli:ll. Ihe.'>l.' effort:- \\ere nO! :-uffic.:ienl to gcneT·
atC :l pmfil for tilt' indl1stry . The..' h:mk:. in lilt:
EIc:'H.'nlh Di:.trie..1 are sliII rt'{'(}\'e..'rinJ.e from thc d ·
ret-i s of till' region:11 n:-(·~s... ion . whith C'.llIs('d sc·
\'crl' fi n:lnd:11 dislfes.... f)cspit(..' th(..' impron~ menl
in the rt.'gio n·s t--'u mo m}, hc~mning in 19$7, hanks
t'Ollllmlt'd 10 n.'J'K11l IO....\l·s and, in :'Onle GISCS, fail.
During 19H9. j ·1Q ("olll11lercial hank... faik'd in dx'
I)i~trict. If tht' p:111: of impron;ll1t'nl Kcnt:r... t(..'(1 in
Il)WJ Gin Ix: m,linl:lined, ho "'(,'\·er. Iht' outlook is
pI11Jll1"lng.
In thi ... artide, I analp:L' tlu: Ix.'rforlll:1I10: of
h:lI1ks in lhl' Eit-'\'t'nlh Dhlriet m 19H<) to dett'f·
mint' 111m h;lnk~ rt:dllt'ed their losse.... the prog·
rcs.~ m;ldt' in rcsoh'ir)g the lrollhk-d assets. and the
('ul'l'e..'nt (,'on<iitioll of Iht' h.111k ... 1 ;llso sCP;Ir.ll t-'
h:mk.-. hy thdr a....st·1 ~17.e to :I n:tlYl.e dillt'relld;s in
the profit;lbili!)' :md financial condilions of ...n1:1l1.
mid~i%(,' , and brgt' hank,..
Sen'r: ll important (rend.. :lft· ck:l r trolll the
anal), .. L.. 01 tltt· hank...· fin;UlCial Slalt'llll'nr... Firsl,
lo...~cs \\t'I1.· 11.·dul'l'd in 19N9, hut tilt' indu:'>lry 11;1:.
nOI yt'l :lChien 'd profi tabilit y. St,:(·ond. till' proh~
IClll of Inluhit-'d a.s:-c'l" W:lS :Iddrcs..,....d hot h by
hanks .1" Iher chargt'tl olT til(..· U1l{'oUC{:tihle loan..
and hy the re..'tleJ~ tI Dep(N T In"ur.lnc(' Corporation
( FDIC) :I~ II rc ...o"·cd hank fail\lfe..'S, A ..ut1Stantial
ammli1l of tro uhkd i1 ~-.cL". hO\\t·\·cr. continue to
'ldn'rs<.: ly afft'ct h :lnk r)t'rfonmmcc TIlird. tht:'
hank:. impn l \L't1 tht'lr c'lpit,,1 ;!t k-qU:lc}, F(11ll1h.
tht· hank ing industry t'ontinucd [0 conso]idalt' in
tht· Di:.tricl. Fifth. hank:. Wl'rt: \'CI)' Iiqllid hut .~I(),,·
to cxpand lending. SIxth, h:mk,.. l'{'<illt'(,:d thc co ... t

C

ticonomlc Ilev icw-Seplc.:ud>ef' 19')0

:md incrt';ls(..'d lilt.' slahility of tllt'ir SOllrn;s of
funds.~

Ba nk pcrfo nna n ce In the Eleven th Districi
FIn'lIlei;!1 pc.-'l{ormann' of b:lIlks in lhe E!e,··
enth Oistrict impro\'cd in 1989 a.~ the)' progrcs.se;xl
in resolving lrouhkd as.sets. hut Ihe.."St' hanks still
n:-IX)rtcd Ios."l's for Ihe ),1..';1(. TIlt' han king indust!)·
(·ollt;'(.·ti\,l'Iy rr:J'K)11~ :1 100al l()~~ of 5523 million in
19H9, hllt thL.. is a substantial imprm'etnent O\·t'r
[IR' 5Ll hillion lost in 19M :md Iht' $2.7 bill ion
Imt in 19H7 (Chal1 It' While tIll' h:lIlking indust!)·
in axweg:lle fCJ'K)nc..'(1 a loss, the rn:ljoril y of hanks
n:-POI1("(\ prufits in 19H9. The'it' profits ;11 till' Ill:l"
jority of h'IIlk.~. howt.'n::r, were offseT by loss{!." al
a minority of ullprotltahlc b;!nk~ .
TIll' progn.:s... tilt: Di..tricl h:lnks m;lde in
rcsnh'ing ltuLlbkd .I....st:ts waS rdlcltt'd in their
b.I1;lm.:c ~Ill't:ts .Ind incollle .stalt'lllcnl.~. III 19K9.
tht: pnwi ... ion for loan losses tit-dined $·117 million
from it.~ 19~ It·\·d. rt:ducing rqxJrlt'd l os~s. and
loans chargt:<i otl' in 1989 dcdined S6N2 million.

The EIoovet1It1 FCd«aI Reserve OtSinct compnses me erwrc
stale 01 Telas. soulhsrn New Mexlco. and notltlelfl LCUSI"
~

fhebankWlg (lata usodlfl ftlIS ana.ys.s lifO IWriiJbIe Iromlhc
ltUthot PIe~ OOfIIac/ Jh6 all/hot ar Reseatch Depart·
ment FCd«aJ Res6tve Bank 01 DsIIas SlsrlOfl I( Dallas.
(0)<8$15222

AD dollar figures 1lIf' f8PC1too

Of]

notJIIIl<IllcrfflS ar>d are not

I!IdlVsred /()( "lltarlOn

"

Chart 1

Net Income
Eleventh District Commercial Banks

..

BiNo'ons at doIars

..0
0.5

o
-<>.5
- 1.0

-1 .5
-2.0
-2.5

-<1.0

...

.

-l----~--~--~--~-~

""

,

""

"

".,

SOURCE OF PRIMARY DATA: Consolidated RepooU at Conditton
and Income (bid at GOYfM'notS.
Fedefal Reserve System)

:-.Iuwing Ihe r.lIl' of lll"dinl" in primary Glpil:ll.'
1111;." It"\'d of inlubll'd ;I ....... l·{:-. dt'dint"d S 1:;0 million
:1:-' int'l'l::tsl· ... in Ihe Gltegory of otht'r n:-;ll t":-.talt'
()wnt'tl Wl'l'l' morL' than otfsel hy tk-(,:IV;Ise:-. in
nonp(c'li'OI'mi nA lo;ms tCh;ut 2),
Rl.'soldng Ilu..':-,t' Irouhk'd ;IS~·t.... plan_··d a
suhstant ial hllrdL'n on bank ('<-'pilal al f)islri('!
hanks. I' rilllar~' capital. lhl.' SUlll of L'qu ilY c:lpi1:l1
and allo\\"ano.' for 10;11110........ l"ell S I.. 9 mill ion in
19139. TilL' tkd inl' in Glpil;,1 comh int'd "'jth a
sm;l ll inlTl.';lsc in as:-'l·\.'> caused thl' primary
t·apital- ;I....sl·t ralio to faJl fl'Om 6.61 lX'rCt"nt in 19RH
to 6.26 Pl'ft'l'n! in 19R9
TIll' ro. . solution of thl' bill'd rln:lIldal instillllion.... in till' IJblrict gt'n(c"r.lll'd a"'~1 gnlwth ;11
Di.... lrkl hanks. MIt:r f:lliing for the pre\'ious Ihrel'
\·C;lI'S. total asSt.:h al f)i:-.tricl hanks roSt.' S2.- hil·
lion 10 19H9. A brAl' POJtiOll (II this ;I.......,el growlh
resultl'd rrom hank :It·qlll.,,iti(lJl:-' of raik·d ....."·ing:-.

and loall :1...."od.lIions (St,."\:bl. Similarly, till' det:line
in nonl"X:rforminA 10;10.... \\'a" IX1l11}' till' J"l'Slilt or
Ihl' FDIC ahsolNnA Ilu:sl' Itb.....l·s while rc:-;Oh'lllg
failL'd b:lllks. ""onpc:l'fonning loans d('dint'll $3.6
billion sinn' tltdr pc...ak in }<,m-.
DistrKI b:lIlks did not imTl'asl' their lending
durin!-l 19H9 (k-:-.pill· thl' growth in ;IS"c:tS (Chart 31.
Thc:Sl' nl'\" a"-"t'I" ;!fl' I")(.:ing placed in \"t!ly liquid
1m eSlmc:n[:-.. TIll'ir It mn-tcl-a."'''l·t "lIio dn)ppc.'"l1
frolll ")2.1 pcft'l'nt in 19HH 10 ...-,4 pc:'rn'JlI in 19H9.
and towl loan., dc:dinl'd 5-.2 hill ion. l-"lmhcfmorl',
thc:St' h;mk .... redul'C:d (hdl' rc.:liann· on lar1-(t' time
dt'posil ..... ",hidl aft' l'xpl'nsin' ;uld qUick to respond to inlt'l'\.'sl '~lle ch:lI1ges. Insll':I<1, they inlTl'ast'd tl1(:ir ll."t' of slahle COJ"(: tkposits. such as
....:ll·ing .... deposil .... and srn:dl til11l' dt:posits.
In l"(1Il1f:l:-.1 to loans, :-'l·t·urilic::-. holding:-. of
l1i:-.I1"ICI hanks incJ"(:;I.'>t'(l on'" till' l;tst four YI;:';Lrs.
:md the (..·Orlll"Xl.... ilion of Ihl' ."l'l'llrilY l"Xlrtfolio
shihc:d 10 fl'(Ic.."ral gowrnl1ll'nt ohJig:llion:-.. 'l1ll'rc
;Il"t' Iwo n.';IS011S for Ihi:-. "hirr. Fil'S\. chanAl's in thl;:'
lax c{.J(lL' rc.:duccd the ;ld\';llllages of illl"Csling in
l:lX-CXl'lllP' S\;l\l" ;mel 1(K':tl gon'mment hond i:-.SllC:S for Ixmks . Furtlll'f. lilt' rc.:nwininA :I(h·;tnt:lges
c:xisl only ror inst1tuliol1:-. l';lming a positi\"(: nel
Chart 2

Troubled Assets and Primary Capital
Eleventh District Commercial Banks
Bilhons at dotla~

"

"

"

"
",
6

,•

...

o

,

""
•
Fot It COOlPfl.">16 C1n3ct!pt0('" oIllO\t IloutllOd -bans affacl
t)anIo hrlano;:ldISI,llll'Mttrs 116ft me be». ,01/6(1 ·HoI·. rfOlltJled

1.00"$ Allocl &In/. Bar.1OCII' Sht:>els am iflCOl'l1(O Sl.1Il"

Int¥ll<

.6

""

TroubItM:l 8$.$81$

•

""

""

PnmalY capotal

SOURCE OF PRIMARY DATA; CoflsoholUeO Raports oj Coociloon
and Income (Board 01 Governors.
Fedaral Reserve System)

1't-·dcrl. 1 Rt.'l>Crvc IIIInk .. r

O:l\I;.!>

Chart 3

Loans
Eleventh District Commercial Banks

.

,Billions

ol doll.,.

'"
""
80
80

20

,
1985

1M6

""

... ,...

,

SOURCE OF PRIMARV DATA , CotIsoIidated Repofts ot Conditron
and If'IOOITI8 (Board 0/ GDYefrKlf$,

Fedetal Aeserle System),

income :md incurring .1 tax li .. hili!r. O,'cr Ihis time
period. many of the hanks were reporting Ios.-:elt:
thus, the potential tax ;Id,·;tnta~t:s werL' worthless.
Se<:ond, the new risk-h:l.o;ed Glpit .. 1 st.mdards
will soon 1x."Come effectin.·. Under these standards, IXlnks can redllce lilt' requil"l_'d <:;Ipital by
reducillg their holding." of slate :mel 10c.. 1 gO\"t'I"nment st'cllritie~ ;md ion'sting these funds in feder.11 gm'ernllll:nt ohlig:lt ion.... En:,)" doll'lI· shiftt'(1
from ... tate and local gon:mtllL'1lI st.·l·u rit ie .... to fedt'ml gm'ernment S(.'nlr i tie~ reduces fl.'lluin:,d capi·
t;l l hy $.016.
Despite thl..· impro\'(:mem in h:mk perfonn:IIKe. l1\1memus h;tnks failed in the E!I:"enth District in 1989. During thl..· },e:lr. 144 COIlllllef(.·i,,1
b.a nks faiit.'<.t. an Increase fHlm 121 in 19H8 (Hohinson 1990). 'f1'eS(" failures inl"iud(xl s(""erallarge
hanko;. sllch ..... ~lDank Dallas and Tex;l~ Anwrican
nank, FOil WOl1h. ~.A , AI )'ear-end 19H9 there
were 1.441 hanks in this Distri<1.
Bank perfOnll;mn' in the Eten..'Oth District
('ompared pcXlrlr \\"ith th;1I of hanks in tIll' rest of
the nation. whitL' Distril..1 o;mks lost monel' in
19H<), hanks outsidl..' thl..' iJi . ..u-ict e;,rned a n..·turn
on assets of "i() h;l.~is poims. '1111..' tliffcrence in
performance is most din..·ctlr attrihut:Illle to high<"r
Economic R~lcw-Scplcmbcr

1990

r.llins of trouhled assels at Distri<1 oonks. TIle
perl..·en!agcs of loans Ihat were ch.trgcd off or
nonperfonning were more th,ln twice as high in
thl..' District as olltside the District. The resolution
of these troubled loan~ left the primary
capit;tI-'.Issct rmiu of rhe District's banks barelr
"Ixn'e the TCHU];ltorr minimum of 6 percent. Br
t'omp<lrison. uut-or-District banks had ;t primarr
capit:'ll-:Is.'iel mtio of 7.82 percent in 1989.
Banks outside the District gR'W much faster
than DL~trkt b;lOks lx."C'lll.'iC of their health .lOci the
strong natiomll Cl..'onomr. In 1989. lotal .assets rose
nearly 14 pt.'f(·ent. and tot;1 IIOl.ms rose more than
16 perC('nt <It banks outside the District, compared
with only I .S-perce", asset growlh at Distri(1
banks and il 7-pt'n.'enl contfOlction of total lO;lIL'>.
Hel..tuSt' of their relath'c!Y wc:."<lk c;lpilal poSition
and the modest pacc of the rt:gion.al l."Conomic
rel'O\'ery. District banks p];l('ed their assets in liquid investments ('"tither than booking new loans.
The Oistrict hanks' 1001O·to-;Isset mtio was 16 percenl<lge points lower than tht!' average loan-loas.'iet mtio of hanks out'iide the Di"lriI..1, which
wa." more than 63 percell!.
Analrzing the pcrform;IIl{'e andl'ondition of
the District hanks :IS a group f;lib to identify
imponant performance differences in some subcategories of h'.mks. One import.tnt distinction hetween lxmk groups is hased on hank as.'iet :-ize,
To determine key diffl..'renccs in pcrfonnann:, and
('ondition. hanks were di,·idl.'<.l into thrcl:! SiZl'
cmcgorics. SI11:t1l bank.. 'i\'t!'re dcfim:d as those
w ith end-of-yc;lr as...ets of $100 mi llion or less.
midsize hanks :IS thoS(" with assets of more than
$100 mi llion <lnd less than $] billion, and large
h;lIlks as Ihosl:! with asset.~ of.$ 1 billion or ll1orc.~
The b'lnking industry in the Elc,'enlh District
h;ls ;1 "('1")' large nllmlX'r of rt:lali\'d)" sm;:llI instilutions. In thc Districi therc ar~ Ll9R sm;11I hanks,
229 midsizc h;tnks. :md onl}' fourlL'en large

The d<ffor~

sue C8/e(}Or16S ,verlt 1101' delerrnned by WIY
not 10 say the

pteclS6 S/S/lS1ICai meltlodolo{ly. rtial IS

cstBflOlI6$ _It cho$sn arbilrsrily These Sliffl categorIeS
march those uS8d III ptlNlOUS artICles published by /tie

F6derslReserve BanI< oIOaJ1ss Thus. the useol thesecalC'
,he rfNldcr's ability /0 compare the 1e5lJ/l 01
/hIS IJna/ysJs ""i/h ptevtoos ICJXXts

(JiY16S trnpfO'<IfJ

17

How Troubled Loans AHect Bank Balance Sheets and Income Statements
Loan losses resulting from borrowers
failing to repay interest and principal on their
loans have several different eHects on bank
financial statements. Loans do not typically
default instantly, but rather they deteriorate
over time in stages. Each stage has different
financial effects on the bank condition .
In the first slage 01 a troubled loan, a borrower fails to make scheduled payments. Once
this occurs, the loan is considered past due. A
loan is considered a troubled loan when the
payment is 90 days or more past due. The
loan might still be considered to be accruing
interest. In this stage, the loan has little eHect
on the bank's financial statements, but it has
a negative eHect on the bank's cash flow .
In the second stage, the loan is placed
on nonaccrual status. During this stage, the
bank's net interest margin will be affected
adversely. During the second stage, the bank
continues to carry the loan as an asset, and
the bank must fund the loan with deposits and
capital. The deposits are generating an inter-

est expense, while this asset generates no
interest income. At this stage, the bank suffers a decline in interest income and nochange
in interest expense . As a result , the bank's net
interest income and net interest margin are
reduced.
Eventually, if the borrower continues to
fail to make payments and there is littte prospect of future repayment, then the loan must
be charged off the bank's books as uncollectible. In this third stage of asset deterioration,
gross loans are reduced by the amount of the
charged-oH loan. The bank must also reduce
a special reserve account-held aside to
absorb loan losses--called the allowance for
loan and lease losses. If the uncollectible loan
was a real estate loan, then typically the bank
would foreclose on the real estate at this
point. The bank carries the real estate on its
balance sheet as other real estate owned,
and the size of the charge-off is reduced by
the current appraised value of the repossessed real estate.

(continued)

ba nks. Tho ug h nu merous. I he small b;lnks conlrol
o nl r S 16 billio n in :Isseis. w hid) is less Ihan ;1
quarter o f tota l h ;lnking ;Issds in Ihe Oislric\
(Ch;u1 1). The fOllneen I;l r~e b:lnks conlrol S8H
billion in ;1.....<;ctS. ncarty half the h'lnking :ls..'iets in
Ihe Di.<;lriCl .
Small banks in the Eleventh District

The

mO.'>1 impol1am diffe re nct: of slll;111
the Ele\·enlh DiSlricl compared with thl·
induslry as a whole is thai in 19H91he small hanks
repon ed a profit for Ihl' firsl timl· in four p:;! rs.
The impl"O\·elllenl in nct incoml' ;It Ihe Distrkt"s
sma ll hanks \,"<1.'> p rim:lrily till' result of impro\·ing
cred it quality Small Districi hanks c;lrned a liny
profit of slightly les.'> than S I million . :lnc! beeHlse
h~H1k.,> i n

os

Ih\:" profit was so smalt. relU rn on assl'ls was
hifldy abm·e Zl'IU CChart 5).
or coursc. financial ~ I fo n nann· W;IS not
e\·en across srn;11i b:IIl k.'"i. The top-performing 70
pt;'rcent oj" thcse smalt hanks earned p rot! ts l o ta ling S_~20.3 mi llion in 1989. lxtrdy of["L'lting Ihe
Io."se." of the unpmfit;lble b:mks. The top to pcrcent of the hank.,> had an ;1\·cr;lge return on ;l.s."e\.<;
o f 1. 1 p t'rt"l'nl. wclt aho\"t~, the n;uion:l l ;1 \Tr;lge of
0.76 pt'l"cenT for small hanks.
T he p rogl"e.s." Ihl:'."e small h:mks made in
rcsoh·inl-\ Iheir Iroubk'd ned its hclpl,t! tlwlll earn
;1 profit (Cl1<In 6) I\onp erfonning IO;llls at small
Disl rit"t hank.'> ."hrank al Ihree l imcs the O\·crall
l~lIe of D i.~lril"{ hank". and Iht' total other rc;d esl:tle owncd <k'dined :1 1 ."mall banks. \\ h ile il rosc
in Illl' D istril·l. This impron~ment in trouhled :1."Fede ral Reserve llank of OaUas

How Troubled Loans Affect Bank Balance Sheets and Income Statements This third stage does not adversely af·
fect the bank'S net income, but it does reduce
the bank's primary capital. A bank's primary
capital is the sum of the bank's allowance for
loan and lease losses and its equity capital.
Because banks must maintain a minimum
primary-capital-to-asset ratio, a decline in
primary capital might require a bank to reduce
its other assets or raise add itional capital.
Even after a loan has been charged off,
the bank still pursues the borrower to repay
the loan: that is, charging off the loan does not
eliminate the borrower's obligation to repay. If
the loan should be repaid in total or in part,
then the funds received are recorded as a recovery. Recoveries are added to the allow·
ance for loan and lease losses and improve
the bank's primary capital ratio .
Replenishing the allowance for loan and
lease losses is traditionally the fourth stage of
a troubled loan .' To replenish this reserve
account . banks must make a provision lor
loan and lease losses to add to the account.
This provision is an expense item in the bank's
income statement. At this stage . the loan loss

:-.t:l.... pt:r111itH.'d 11K' :-.lII:dl h:lIlks 10 Ill:lkl' a .~ m a l k r
rr()\"i.'>ioll (or 10;H1 <lnd h:ast' los..,>\::-. :lIld likl'''' nmIrihllll'd 10 tht' dt'l'!int' in nonintl'l"l'st t'xpt:n:-.I.".
Small h;lok profit:lhilil), al'>o hdpl'd tilt'S<:
bank.... l"t'hlilid their C1Plt,d adt'qu:lc}". In C(Jntl~lst
10 lilt' lit-dint' in c:lpil:il r.nio:-. in fht· District . small
h:1I1k ... inncast-tltlto.:ir primal] capilal- a:-.set rolfio
froill M..~ pt'n-t'nl in 19H1-1to 8."2 fll.:rcent in 19h'V.
Capital a{k--ql1,Il'Y \\ ';1 ... :11.'.(1 Iwlped hy tht' Ff)IC
d()... in~ many small. m.·..oln:nt h:mk:-.. TI)(,: relll;tinin~
"m;lll hank:-. \\ l·ll..· ll(.'allllicf :md IX.'Ut·r Glpilalizl"tl.
on ;1\ 't'I~'~t' At yc:ar-i.·nd 19H'J, :..m<lll hank .. could
ch;lrj.:l· (In 61,4 pern'n! ()f Ihelr IlImp,..'lft)flning
10:111" aj-l<lin .. t the l'X\:-.llIlg ;llIowann' for loan and
k:1";(" IO:-.... l" .... (ompart'" \\ Ilh only "i:?2 fM.'rn·lll al
\'t'ar' l'nd 19XH
f'lIHm' rnnc;t ..v:-. in pmll,ahililY al Iht· Db·
Et-onOfll ll' Kcvll.-w - Sc" tc mbc.'r 1990

Continued

directly reduces net income.
If loan losses are severe, the provisions
may be so large that the bank reports a net
loss. In this fifth stage, loan losses will reduce
the bank's equity capital. Again, this would
reduce a bank's primary capital and may
cause a contraction in bank assets.
Another cost generated by troubled loans
occurs at virtually every stage of deterioration . Bank management must monitor these
deteriorating loans much more regularly and
more intensively than performing loans. This
monitoring generates noninterest expenses,
especially in the form of labor costs. Furthermore , the process of collecting a troubled loan
Will likely generate attorney fees and other
expenses.

rnet. h;t •• beetI 'f'~ "allfJe bot,,;, e'd<_/IOtt J)'ocess
15 'hangOO itll(J I". fese<ves 10 aO$Of'O IOdn lOSses ;lIe
>()~ /0 be .>t:,east'(1 v.tote /he /OaIU' .., qvestom a.;/,;ajly
b..

:.Jill'

71t>eflom..

'9

Hit'!'... small h'lnks {kpt:nd largely on 11ll' hanks
nllliinuing 10 redUCt' Illl:il' Irollhkd :ISSt·h. Despitt'
Ihe prOwl..·s... Illadt·. tht, !lullhk'(I-:I....SCI r.llio al
1111..':-'(' hank... is Illud, hight'I' Ih:m al Iht'ir l'ount .... r..
p:II't ... in lil(;.· rt· . . ' Ill' Iht' n;llion. FUI,hl'r rcdu('lion in
prohkm :I........ d ... will likely I~li .. t' 11ll' net interest
m:lrgin. rt'(luCt, nOllinlert'st CXIll'Il-.c..... and ;11l()\\'
ror a .... mallt'r pro\ l:-.ion for IO:1n :lOd k·a ..c los.'>C~
In C()ntl~l~t 10 till' :..nlall 1I1Hl';I.St· in 10la l
h;lIlkin).! ,1 ....... t'I:-. III tht, Di'Micl ......SCt.... ;11 Iht' .small
h.mt...... d ....dint'(lmore Ih:1Il 10 Ill'rl'cnt in 191-19
(C.h~1I1 -" Thi ... dt'dint' w; .... p:1l11y rhe re:->uh of
h;mk failu('(;.· ... and ('oll\t· ....ion:o. of -"111:111 hank . . into
hr.1rl<'ht':'> 01 largl'r hank.... Funhcnll()I'l·. ,>lllall
hanks art' Ie.,... likdy than largl' h;mb 10 purcha ......·
l'aillo,d hank ... or So"Ii.:L.. At tht' 1110fe I')(X)rI~ capiTal·
il.t""{.1 ... mall hank..... h;lok mana~l'I1lCnt prohahh

Chart 4
Shares of T olal Banking Assets
Eleventh District Commercial Banks

third., ot lU ids i ~l' h':lnb 11.·(.'on:k·d p rofit.... in l<..my.
hut t hl·~.' p n lfib were morl' tl1:11l o tfS(."1 h y til,,'
In ........"·. . . reporll'<.l hy thl: ollwr ont·-third o f midsizl'
hank~ .

,h OCUIrl'l'd :11 "II h:tnk .. III lhl' Di . . triLl.
~1I1:1 I kr

prO\i'ion for loan and IC:l~{' 10:-..""::-- Iwlpo..'(1
hank ... rl·dun' thcir nCI In....". Thl'~l' h:l nk.,
<l bo n:dun·d Ihcif nnnintl'r"'$1 {'xlx·n,..;l'...... As . . . I:lll'<I
pre\·i()u~lr. till: il11pron'l11l'nt in ;IS.'-<:.·' quality can
11.·d uct· tlw m:l·d for .~Iaff to monilor tro uhkd
e['(.·d its COlbL·q ul· lltl r. Ihl:."'-· Imllk:-. 1\ ('re :ll1k 10
re du cl' n(Jn i n t l' rl'~l t:XPl·))SI.: as Inlul ,kd nl'di l ~
fd!. .' \onpo.: rfo rmin),{ 10: l n~ li: JI .~2 1)(:.'ITl'nl in 1')HI) .
a nd rero.",,,"·.o;sl'd re;11 e:-I:Hl' dcd inl'd Ill.!:lriy [I)
PCITl'llt. In U)I1II,ISI 10 Il1l' DistriCI to l:tis . no niniL'rl· ~t incomc \\ a~ 10\\'1:1' :11 micl."izl' han ks in 19KI).
Alt holl!-:h ca pil:l l :tdCq U:1C), dl·tl·rio nllo.:d for
I)i ..lricl b;tnk . . o\'l'r;III, it imprnn'd ;11 ti ll' mitbiZl'
Di.,ll'ict hank.. . . T he p n mary Glpit:1J- a''''''l't mlio ro.~
f!'Om (JJ'~ )X'IU'1l\ in 19HH 10 - .1Ix'rn'nt in 19X9.
!\lid:--izl' Dislrin h:Ul k~ had $lIffit'il'1l1 loa n loss
rl'~'r\'C'" til dl:l r~l' ofT :lpp roxim;l lcJy half o f the ir
llo l1pt·rfo rtui n).t 10 a l1.... :1.. . o f yl·ar .....·nd 191'19. Still.
thl'ir l·olllltl·rpall... ollt.. . it!l' Ihl' I)islri<:l l'ollid
chargt· o lr :tlm()~1 h'i pt:n:cnl of 111I..'ir no n pcrfO flllinl-: loan...
nll(lsil.~'

",,.
.....
...

.SOU RCE OF PRIMARY DATA ConsoLIdaled Aepons at Cond,toon
and Income {Board 01 Goverroors.

Federal Reserve Syslem)
rl"'(i llt'L·d a~1 tll lidin/-t-' to mailll:lin Glrital-;I.....'-<:.·1
-11K· l'onlr:lt'lion 01 a.'i$cl.' \\ :1., COIKt:nt r;Hl"{l
in lhe loan p0l1fo lio ol'l' I~111 and in CtJ111Jl1L'fcb l
;Intl indl lstrial loan.' ~ IX·t·i fk:l l l).
1~ ll ios.

Midsi;re bank.<i In the Eleventh District
The perf0J'111:lIKl' o f l11i<lsi;;.e h;lIlks in thL'
clt·\·i:l«:d n : ry link' from that of
till' Dislril'l b; mking induslry as a \\·hok . Tht'st,
hanks re<iu('r,:d tlll'ir lo . . . . . t,.·:-- ill 191'19 h ut \\·l· rl· nol
profil;l hle. Till')' Ill;t(il- SOllll' r rog rl'.o;., in impro\'ing IIWir as:;t;.'1 qu;d ily. hllt tht· "l' i." room fo r furt h~r inlpro\'l.'llll· nt. T ile.'>\.' h;mb innc;I."L'd Iheir
liquidity :1 . . . IIll'i r Io.:nd m),{ ;ll'ti"ity dl·cltned In addition, the $trut·flI rt· of their funding shirtl'd a\\'ay
fnlm brge lime dq)(l~il" and 1(1\\:lrd 1ll(11'l' .~ t ahk
suurt'l',' of fundo; l'iwn' \\'l'I'<:. howen.·r. 'iOllll'
d ilTerenle.. . 1k'lwl'l'n till' r>l.. rf(lnl\~H'n· of lIlidsizl'
h:tnk~ and Ih ..' ni~lril'l ha n king indu~t r)' O\Tr.lll.
!\·Iltisize Ixtnk.. . redtJc<:ti tlwir lo"-.......:s hy 5-;11'1
mill ion III ) <)HI) h~ il11prO\ ing :l'iS,,'1 quality ;lntl
c()n \lul l i ll~ ex l"ll'I1$I:.... hUI Ihl"l' hall k . . .. . liII n:I)(Hlcd a n,,'! 10.,.. . 01 $ 16·, mill ion The poor rx.'rfO rtlKIlKl· of thi .. group i." An:at lr a t1'('('IL·d hy :1
minori t ~ ot u npro fil ahk ha nb. I~()u~hl~' I\\"{)·
Ek \'(:~ l1th D i.~ lr k t

10

CharI 5
Return on Assets
Eleventh District Commercial Banks
Pereenl

"
05
0
~.

"

""',,"
.....
,....
......

-"
·20

-'<.

...

,,..

,

SOURCE

OF

PRIMAAY DATA

19"

....
""""

.

"

""

Consolodaled RepoJis 01Cond,r,on
and Income (Board 01 Governors.
Fe6eral Reserve SVSlem)
I'!:dernl Reserve 8:mk of n "tl:ls

Chart 6

Troubled Asset Ratios
Eleventh District Commercial Banks
Percent

"

9

8

bo,'"
"'"

7

,

MKIso~.

bOO"

5

,•

Smo'
banks

2

0

1966

1985

1987

1988

"89

SOURCE OF PRIMAR Y OATA : Consolidaled Repons 01 Condition
and Income (Board 01 Govmoors,
federal Reserve System)

Ahhou)..\h tot:11 h;tnkin)..: :l~<;{:b i1l<.Tea~L'd in
11K' DiSlriL'\. ~I ~~t'b contracted al thL' 1l1 id~i7.t:
hank~ T h{: contl~1('t ion i n ;I~~el~ wa~ ('(In<:e ntl~lI ed
in til(: loan pOl1foJio. w hich fdl $'t 2 hill ion ;II
t1lj d~izl' Di~lri<:t hank~ in 19H9. UOlh n;;1 1 est;ul'
loan~ ;Ill d <:Olllllll'ITi;tI ;tnd jnd u~fri~11 I()"n ~ dl'd illed ~lIh~l;tntjally" Ofr<;l'lIitlg a ~l11all pal1 of tile
dl'di n{: in loan~ W;I... ;1 $')43 millioll intTea~l" in
~'{"uritilO~. Similar 10 ol lll: r h: lIlk~ h(Jlh inside :Ind
outside Ihl' Dislrict. inn.:stIlK·nt ;t\ Illid.'o;izl· ha n ks
shifted 100Y:lrd l' .S. T n:asury ~'Cllri l ie~ ;lIld ohli)..:a·
[ion."
f{:(it-ral agl'llCil'S :lI1d away from ~curi til'~
issued hy ~Iate and IIK;!I )..:()\·l'nlnK'nl.s.

or

Large ba nks in the Eleventh District

and a shift a\\ a\' fro m expenSi\'l·. les~ st;lhll'
SOll l"l"l'S of funds, sllch :1." htrW': l iml..' deposils and
o(h{:r IX )rn )wed lial)ililies. t()\\":lrd 111111....• stahle
rUllds, S Udl as sllw illi tllt" and sa,-in)..:-" deposil~.
Thl,:n,' \H:rl', h()\\I..'\'l'r, SOtlll' inlt'H;''sling dilr('rel1n:,~
1)('I\\"l'('11 IheSl' br).!1..' h:mks :ll1d Ihl' small :1I1d
midsize h:l n ks in thl..' Dist rict
Large h:l l1 b in the Eil" "l..'nlh District reduced
their losses hy S1 hillion in 19H9, h UI thl'se brg{:
IXlIl k ... just as Ihl' midsizl' hanb, reported an
aAArt")..:~IIt" loss of ~,j(1O million 1(11" the yl..'ar. Only
5'i IX'Kent of (Ill' large han ks I"('pon{:d profits,
1I0\\"l'\·t:1'. whill' more th;1I1 (wo-th ird s of small ;lIld
midsize h;lIlks Wl'rt: profi[ahle.
T ill' SOll r{'l' of im(lI"{)\·l..'d lX'rfo rm ance al
I:l rgl' h;lIl ks "';IS a sh;lrp rise of S I. ') hillion in
Iloninlerest income that was p:mi:t l1y off.'iI..'1 h~' :t
higgl..'r prm'ision for loan and ka s(:' los.",-·~. Thes(:'
ch:lI1ges al"L' in sharp contrast to the changl..'s al
tile slll:l ller hanks, \\·hl..·I"(· there was liul<.' dll1Jlge
in noninlt:'resl ineomt;'. and dedine.'i in Ihl' prO\'i", jo n for loan ~Ind leaM' losscs aH·ounll..·d for t he
imprO\'{:llll'JlI in pelformanl't:. The lar!!l..· inn-easc
in !loniI1K'l"eSI income ~llggl..·St... Ihat thl..'Sl' h:lnk..

Chart 7

Asset Growth
Eleventh District Commercial Banks
Percent
20

5
o +-~_

5
10

Til ...· financial p{:rhmn:uKt' ()f till' District-"b rgl' hallb \\ :1." simil;lr In Iht' Dislrict's o\(;:r:111
pl'rformann:. This is 10 he expl1.:ll'd h l'C:III."<.' Ihl'Sl'
hank~ conlrol n(,;II-h- hall' of ;111 h an(.;ing a~sl'ls in
th ...• I)istrid :\~ occlI lTl.:d ~II Illidsizl' h;lIlb. tIll'
b rgl' h:mk,~ I"l'dul'~'d I Ill'ir Io.-.sl..'s Sllh~I;lIlli:t ll ~ i n
19KIJ h ut stillr<.'pOrll..'d.1 Ill:t loss for Ihl' ~l'at
Oll1l'r si1lli larit1t·s 1>..: 1\\"('('11 Ihl' I:trgl' h;tnb :lIld tlK'
(llhl'l" I)islrio IXlllks illl'lmkd slllalkr Chal")..tlO-(ln:..
1(11' unollkctillk 1();II1S.:1 I(}\\I..'I" 1();tIl-I( hISSl'l I~lli(l,
!:l.'Onnmk Ikvkw -

Scplemher t990

-20
-25

-I---~---~--~--~
1966

• Small banks

1987

1988
Midsize banks

1989
~ Large banks

SOURCE OF PRIMARY DATA. COnsohdaled Reports of Condition
and Income (Board 01 Governors,
Federal Reserve System)

~"II"(I

J" '!Utin ,),\..I3S.1H

I'~ I ;')IM'I

..... 11 I" ,:unl"'1 '1l1nl PI": " ...... '('1"1:"1 .1l'I."IX.' .)111
\'I.~u,,(.k")J I':UUOll .... '11 "I~ p.)1.1.-xh.) .)1.)\\ ~.ll.'!lod
.. p,....n .).\IW\.I.")qllD .).101\ ". 1I~.1.\ 11:'1.,\,)" 1<'1 (I.1 ....q
.)II:q PIli: 1\1:-11\ \lIr.l.)Il.,:-I .....11: 1.11.11"'1([ ,)qlll! q ,,,, \, P
·lill.)

l!p.1.1:) :illlPU,'1 1l1l:.I I:-.UO., \1:\11 '~lll:q .)IlIO" II'

11~I!dl ~' '1l11:q JO "P "")1 \\"1 .11 I ....1,'" \lll.uoq P')U!lI:llb
11IOJJ p"nll.'p JO ~.11:J ,: ")'11101 ·"UOlllpUo.l ""O!,l1q
1':'1.)U.)i'! III \.l.) 10,1.).1 )IlUOllO.).l I':IIO!:-I ....J ,'ljI ,'IIlJ..;"p

I.)I-II'!(I .llp tl! p.l'.·':.").I."'1I1 Inll "':1:'1 ~lIlPll.YI
."1.,,\()[dlll.1 .I.xl "\.lS"I: II! W'!II"U ("'(", 1I1:l(1 .'.I0Ui
.):-11:.1.1,,: PUIS1( 1 ·... 'II."IP1 ..'II1I' S~lt l :q "P 'I \\ '"..,.. ",:
1I! 1I0!II!lU
t [.W."I .10.1 .")."I,\o[dW;"I ."IW!I-lln.! .)un \Old
-lIl.) "'1u':q PUIS!(I ·.\[lU,"U Ill: ) " 1-1"-';1: p.1lql1nll liUl
-.IO\!LlOUl.l0 "".),lOJd ."I,\!SU.'IU! -.I0qq ;"1111 JIl ,"'nt ~""")(1
S'III1:q PU\"':I(I .")111 W .1,'\\01 \ll ."),)J:xi 01 ·\lq:i'nflJ
S! .\\!I!I.mr>wd ."XII!" I ·".1UI:II·S :i'ulpnpul ·,."'",xlx ....
1",1.1.,\U!UOU .unp.... .1 pUI! 'S""SO I .1"':,'1 Pili: 1I 1:()1
.lUJ lIIJ!'! \Iu d .I.111l:I11S I: IlIlU.,ei '1,,:i'.II:lll 1".'.I"ll1! 1.... 1I
.1111 .l.\wdlu! .i[" '1 1111! II ,..,,,"':1: p,'lq1l0Jl :1u!.)np.).1 1I!
11l"UI.l\ll.ldlll! J,")I[lJI1:1 .UlllllO.1 :)(11 10 1".").1 .1lJIlI! "I:
I.lPI"I(lI[lll;"l,\.'[:1 ·"Ili l Ul 11:1!1J "I: .'\'!III UI:111 ,.... ,OUl ."\11:
"W:OI 11: 101 JO IU .....1J.xi I: .. I: 'lu:,,! i1U]llIJop.xluo.\
lu.")\U ,.... IOJdul! .lOJ WOO.l .).\1:'1 "'tlU:q Pl.lI"I(J

<,

'0661 UI
-\Ifl!<t l!luwd 01 lUIlI·)'! lI!.\I "':'1111:q l.1~llS!(] !j11l,")·\,)!:1
"-'II~L 6H61 " I! II! .1.\o.ldw! II I ,.,IlU!IU!),) ,").)lll:llI.lOJI,)([

)jul:l1 J I '\UIlIU,I\OP 11:111 ,iq IPI "1lI'")ltjc)J([ [I:nplx.).l
.)IP 1[:i'lIllJl[1 :i'U!'1-,O.\\ ,-'JI: "'tllLX[ .)1[1 pUt: 'd{6T
uf 1),1pU.1 P !JIS!(J slill <i'U !I.).""I,UI: U(lI",,;"I.).")J P:UO!<i'.)J
,)!j.L '.1111]1 J."),I() ;HOJUIll! 01 ."IIIU!l\!O.' ·\[·""I:'>!l l Il!.\\
S'IU I:q P!.lIS!(I 1[l1I.") \,'1:-1 10 ".") UI:lL tJ0J,;td '")\1. 1.

suo!snpuo:)

"
:1Il1I'IOll '1 l wq III '~IWq [1':111" \IU:lll 'I"-ll.' "'1UI'q
.1iill~1 .11[1111111 "1.)"..... 1: :-Illl'lll1:q 1'\ llO!lt:P!I"SlIl)l ')111
"p.'II ..... 1 ~U')llllllt"U! .)ii.l I·1 It' 11111,).1:1 ..,,-';1: .11p ·.).)I~
_.1p ....:i.lI:I': 11.1. il .... \I\.1.11k ... .1 · lll.l,}J .... d _ 1'111: 111.'.)
-.l.ld Of '1((I~al" "'lul:q ''''''!''P'tl' put: 111:1\1" III ,,,,,,,,'1:
,11"'11 Ill:l[l J.)qli!\I
.1.11: pLlI: 6H61 III Ill.1.1.1,xl ':1 1l1!t11,'JOl\l 11.-'.1:1

"(11 ','III!1 .1UI1:" .1\11 IV P\·111::-U', 1
\lOll

"~lll:q .1:1.11:[ ')'p 11: "t.....""V \.)11""(1 ."I'1I11! S~Ut:q .V!"
-Pll\l pUI: 11.:111" '")1I1 Pili: "'tU1'q .):1.1t:1 ·)lJ 1 l1')""1.1q
..... lU.-,.I.'.ll'P .I.")IPOW: S! lj l,lIo.l:1 ..,..'''1: :1WUIS

·p."I..,[dIllO.l ."1.\1: "'111l:q P·... I!!:,! .....1.11[1 "III .I()
"lll 1I1II1(
:)I( 1:1 ."Iq I .I"I.W ,ll.1"11 ."-1,) 1,"'.1 .\1:11( ""'~-';I:
JO\I!p:nh .)IP "! flu, ....,1 .l\lll::i'.)LI "1111 'lI!r~v ''''1UI:(1
.):1.11:1 .... '11 It: :iJuo :i'1I!'!J .).II! p.)U.I\O .'It:I".") p!.).1 ,I.lIJlO
PilI: "Ul'ol :1U!1t1.10.lJ.X[U(XI IIlq ''''1lll!q .10 ,,;"IllS" .).""1.1111
[ l'~ II: 11'-'1 "1I0-.,:1,1l:1[) ."I.U: "~111:(.1 .... "1.1"1'1111 I'll I' 1I1:\H,
111:111 ",.""... t: p.)lqllll.lI.ll.1lj\ :1U!"lp."I.lllO s".'.I:1C).1d
""."11 :;\I!~I:UI .'11.1 OJ .11!.xkh: S~ll t :q .-,li,I1:1 .111.1.
\[dWl(" ...."1:.).0111 II! II "()!ll~t Wild I!.) '")1[1 '''llO!II1I1I''U!
:111!.I1I1h.w '")'11 put: :)1([:[ .)IJlllltlJj "UO)I.).,IU! [1:1
-Idl!.) lIII .1I P.... ,lo".1J .1J I! ";)<;1!.1 ""')'1' 11.)1[.\\ 1"1)(11:.1
.\I!llh.,o.l,"I" p.")UI><.I,l.I ~ltl:q .")uo put: ·1':lldl:., .\lIllh.)
.) 1!11::1.111 1""'\.1(\(.[.).1 S~Ut:lJ (1.11 I .. \IlIl.'lIb.)o.;U():) ·"."lJ1I
-111:.1 ~lIl:q ,):i,ll!] ......... IlJl :iUI.11os."l.I.l0 "':";"1"').1<1 .... IJlll!

"."l,l

..'1:11 :)[(1:1 ')111 '6H61 plI."I-.II:,"I,{ IV ·.1.1'\".\I()l[ ' P,1 11:IS

-.1.).10 .il"")!.l.)" ')(I _\1:1\1 .1U!p."IP.1' lL " ~ II1:q ,l"l.!~
-P!LH pU I: II':W" 11: 1)'''I·un.1.1o 1\"1 ,\\ 0 1 .I,")JUIlO.l '6H6 1

tI! IP.! ":>jU1:q "liJ!!1 JO.! O!II:.! 1........... l:-I':I!UI~l .lLJ.L
"''1 l1l:q
.)Z!"P'I\I pm: 11':111" .\q p.)Llod."IJ .1"u.xix.") IS'."),I."II
'LllUOli til ..·.... 11)1-"','11 ."11111[1) II ,\ld.ll!llS' "I"I~IIU O.) ,,! III
' u !,:liy ."Isu.){lx;"l IS,"I.I."I1UIIl('1I 11:1I0!I!PP ': S'."Ij l:.I.1I1 ,)l"C
.\II,:.)\d.\1 S;"I11.\.I.)lo" l':uo' lfPjll: lill!p!\Cl.1d ·..... ';tllIOI
-"ID "I! 01 liu!p!.IOJU ,,! I! .....up.l,)<; ;"Iljl ~U!S't:."l.I.)U!

IU.).)J.X[ yz 1

S'I ~1I1:q

.,tll Il!l[1 lo"."Il!th,,! .\11':11,,11

.)lUO.")UI

IS.""IJ."I1

'''PS"I: p~'JqIlOJI ,'.::)[(1:1 ."IlIl <i'lI!lil!
-l!l:llL.10.1 ',"I.)J liUlllJI:."I .11.[ .\\OU .\I:lU pUI: S'UO!tt:"I.!J ':\

LI! "I: \\ JIU")() p!P Wql lJl IIOJ~ ')lJ. 1. '''~lII:q .-,<i'Jl:[
.lIp u:- jU.l.1J."Xl Z UI:III ~'S.")[ -.i[IlI:i!IS ."»;'cu 'Ipmpl:

-U!UOU 1':lIIl!I!Ppt: jjU! I I~I,1U')D ·.)lllO.JU! 1".1J.1IU!Utll!
.1"1[:-1,,[ "1[101 p."IWI,"I·1 ;)(1 .\I~lll q.'!q.\\ '.lSu .x1x;"I IS';"\
-.I.1111!1I0U 1I! UO'I]!lU OHSS JO .,S'l::}J.)II! Il l: .\q 1;:)S.l!0
·\1lWd SI:.II s~rU I:q :.li.l I:1 ]I! IU.,tu.),lo.I(ItU! rill.l.

SU I:01 11:1JISnpu! p UI: [':!.'J,)lll\tII'Q 'P.lU!P')P "Ul:ll[
P ~IIlI IIl.)!.I <i' I : pm: ·.I.1ItLllSUlI.l ';"'WIS;) P:.")H '"UO!I!!'
-UO.1 sS;)ll!snq P:;)01 01 P·l\1:Fu I"":;'I[ ~';"I1J()<i' .... u:,) 111:01

.In 'UO! 111\11 I;:-(:$: .\1110 ":.\\ ,")",:;)J.)U! ,")ql ]IIq ·,")so.l

:iU!PU')1 ''''tUt:q III: 1\: 1;)!.n"':1(1 .)IP III P;"lll![,)'1P SUI:ol
1':,01 ,'1!1[J.\ ·lp.II(lJ:i lIl:01 lpmu Olll! .1w1sUI:.tl IOU
1'11' "'tUl:q P!.lI"!CI ."):ill!1 ::H[I )I: Ill,lI(uli I;)<"SY
'6H6 1 III "'t ll1:q "".wl <i'IIOlW: Ip.llll.l:-I I."}!>''S I: jt:IOI
.ll[I.jO IlI.'.).I.lU 0 1.. \PI:.)U JOJ p .... llltlO.1.W ~'liu! . \I:S .\I!"':

-!dlD;tJ p.)I,,!sS't:-:JIU:l IP!.II P"l1!!.XXS'L! ~.I.l.\\ "'tllt!q
P!J I!.I( [ .,:i.l I:1 U.,.)1)1I0J ''''1[1 JO ~!S ':)[(1:[ .)111 .\<1
P,'U.IIO .1\Oll ,'.11: WIP " I....!.-.;': p,11qtlOJI ,1S'.")tp JOJ S'.').1!.\
-.I:lS \ U .)LU.,:il~Ul!tll ':' P!.IO.IU 01 11 111!tlliu!-'lnh.1I: ,"11[1

" lq!SSOU .1110 ·".1.ll'\.I·'oS :iU!>jIlI:q .:IJOW :1U!IP' .").Il!

;"11(1 JO ";!Ij.)UI:.tq "':1! p.")I':p! I(J"1I0.' ri.l;t.11 "."I]LlI:UIUO.1

Ijll·1I SP' :.tl11t).') U,"'I.l0 II ':lJnIP:J '")1[1 P.IIOS,"I.I :lJ([d
'")'11 .I;1IJV '0!l0J~,od ~Ul:q ,'1(1 JO 1110 !.1."}!>''S1: P~'lqntlJl
,)111 JO ISJO.II ,)1[1 ";)>jl:) '\III:1lS11 :)[u.-{ rilJl '''I!i!J ~ll1:q
I: U·)LJ.~ ':lI(Jd ,)1[1 .1<.[ .\I:Ul ",).'].\.I;"IS' :.s01I[l JO J;').\nq

~.llp 'Plll)')~ ·.ill\:dmo.) <1UlP[Ol[ .llp .10 '1l11:q pl!;"I1

-l,"l.\!lI:l JO uO!l!s!llb.1t! >jlwH 11:UO!II::"; "I:X;"IJ. 1I~:l:-.i
.lll.L 'lo"IJPIIi PilI: ~"IUI!q P;"II! ' :J p.1J!nb,w "'tll1:q .1:i'J1!1

p:l~ !>C\"l'l'.l1 y,:.u~. En.:n 11OLnk:. Ih;11 :111:' in ....Irong
fin:ml"ialconciilion. ho'Ac\cr. ;m: \"t'ry S[O"" 1(1
exp:lIld lending. Tiglll l"!"\."(lit I.:onditiom. in Ihi:-.
region willlikcly cominuc in Ihc future.
Somc ;malrSl" arglll' that thl' bl.:k of \.·((.'<.1il i-;
slowing Ihc n:gion":. \."("onolllit" fl."CO\"L'ry. While
thai 1Il:IY he: tnlc. link' c:m hc don\.' 10 illIe\'iaft: the
tigbt (.'(c.:dit. Thi:. region is cXfX.'ril.:'ncin~ a Ir.msilion
in \\ hid\ hanks :\fC adopting rllOJ"t: (·onsc:-I....;ui'·e
{'rcdil polici\.'s ;md an..' slO\dr l"l\.'("oming finam:ially
stronger. Businesses are fadng mOI"l.:' stringent
stand,u'ds to qualify for (:redil. This period of light
nedit is tbt' price Ihat lllll.... t h t· paid for relurning the ha nking indllslry 10 prudcnt hanking
Pl";:Ktl('es.

Economk Kcy!cw _Scpte mber 1990

"

References
Clair, Roix-n T" and ,h:ffelT W, Gunther (198'7),
~ProbtcOl Loans and the Profitability of Eleventh DislrictCommen.:ial Banks in 19H6,- h'd,
t:r.1I Rcscr\'e U;lOk of O:.III;lS I::collomic Rel'ielf',
Nm'embcr, 1>-28.

l4

Rot)in,'>(Jn, Kennt:th J. (19<)(), "'111..' Perfonnann' of
Eh;"enlh Distrid Finan{'i:lt tn~lItUli(lns in the
1980s: A Uroader Persrx""C1i\'c: FI,.'"(ler.11 RcSCIYC Bank of D:lllab FilUmcialludllsfr.,. Sfudh':i,

t.lay. 13-24.

Fede.-"I RCliCrvC Rank or Dallas