Recession, uncertainty top challenges for banks in 2002

The performance of the banking in-dustry is generally a reflection of the ec-onomy. The strong, stable economy that we have experienced during the past decade has been good for banks. This has contributed to record bank earnings and has encouraged the formation of many new banks.

When bank customers are financially healthy, banks tend to do well. Borrow-ers will be more able to pay their loans and are more likely to want to use credit.

The current national recession has al-ready resulted in decreased banking in-dustry earnings.

Delinquencies and bankruptcies have increased, and interest margins have been adversely affected due to the de-cline in interest rates during 2001, following rising rates in 2000.

In southwest Missouri we are fortunate to have a diversified economy, which helps moderate the impact of a recession; however, diversification will not completely insulate us from problems. Spe-cific segments of the economy, such as manufacturing and retail, have had particular difficulty.

Low interest rates have stimulated real estate sales and refinance activity, as well as new car purchases; however, this ac-tivity cannot be expected to continue through 2002 unless an improved economy promotes additional demand.

Cheap credit facilitates economic activity, but there are clearly limits to the benefits that it can create. Businesses will not invest in expansion if they lack confidence that they will be able to meet their financial obligations, even if credit is cheap.

The combination of the decline in the stock market and low interest rates will have a detrimental impact on retirees who are living on savings and investments. This will be compounded by in-creasing health care costs.

And retirees are not normally large users of credit, so they do not benefit from reduced cost of consumer or real estate loans. This will create additional pressure for them to meet basic needs.

Banks' performances will be impacted by the economic well-being of their specific customers, not economic averages. Banks will face challenges in 2002 that have not been experienced during the careers of many young bankers or during the existence of many new banks.

The local banking market is very competitive. This is heightened by the large number of banks, as well as the deregulation of the financial services industry. The distinction between banks and nonbank financial competitors has been blurred.

Some banks are offering insurance and investment products, while some insurance and investment companies are of-fering more typical bank products and services. This heightened competition provides both opportunities and challenges for the participants; however, it should be beneficial for the consumer.

Positive factors for area banks are that most banks are well-capitalized and loan loss reserves are strong. Asset quality, as reflected by recent bank examinations, has been satisfactory, and the Federal Deposit Insurance fund is well-funded.

The late Dr. Curt Strube, in his much- anticipated annual economic forecast, could be counted on to say "the market will go up and down and up and down, but not necessarily in that order." And he was right. The banking industry faces considerable uncertainty in 2002, at least partially due to the uncertainty in the financial markets.

Our economy will rebound, but it is difficult to predict with any confidence when the change will occur. We have grown accustomed to stability that has not been historically typical.

For banks, 2002 will likely be a year for consolidation, as with many other businesses. Efficiency and strong fundamentals will be rewarded.

The emotional disruption caused by the Sept. 11 tragedy is moderating, and it is hoped the feelings of unity within the country will continue.

Economic forecasts appear to be more optimistic for the latter part of 2002, although projections of that nature are subject to error as we look further into the future.

(Mike Williamson is president of Empire Bank.)