Financial Industry Perspectives
1992

Other Issues of Financial Industry Perspectives

• The Relationship Between Loan Classifications and Losses: The Effects of a Changing Economy
  By Catharine Lemieux and Kenneth Spong

The agriculture and energy sectors suffered dramatic declines during the 1980s in the Tenth Federal Reserve District. Bank asset quality also declined during this time period, particularly for farm banks. Using information on loan classifications and charge-offs, this study traces classified loans over time to determine their subsequent performance.

This study found that examiners were able to identify a majority of the problem credits prior to charge-off. Additionally, examiners were able to distinguish the relative riskiness of problem credits. Economic conditions were found to have a significant impact on the disposition of substandard credits during the 1980s. The results of this study, when compared to other work done over the 1960s and 1970s, illustrate how economic cycles can affect both the volume of classified loans at banks and the loss rates on these loans. This study implies that bankers and supervisors should take a long-run view in judging the adequacy of capital and loan loss reserves and plan in advance for periods of economic stress.

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• Performance of Banks Acquired on an Interstate Basis
  By Kenneth Spong and John D. Shoenhair

Interstate banking expanded rapidly over the last decade as all but a few states adopted laws allowing entry by outside organizations. The resulting changes are now raising many questions regarding the performance of interstate acquisitions and their effects on the banking system and its customers.

This study examines a number of these questions by following the performance of banks that were acquired on an interstate basis during 1985, 1986, and 1987. Overall, banks acquired in these years appear to have successfully handled the shift to interstate ownership. Some acquired banks were able to make improvements on the cost side and many became more active lenders. For the most part, though, the banks performed in a manner similar to banks not under interstate ownership and did not appear to have any substantial competitive advantages or disadvantages. This performance suggests that interstate expansion will continue to occur as banking organizations seek to enter new markets, but this expansion need not be of serious concern to local banks.

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