News Report
Worsening Bank Assets
Many of the traditional quantitative indicators suggest that bank asset quality is deteriorating, and that supervisors therefore need to be more sentitive to problems at individual banks, both currently and in the months ahead.
Some of the credits that were made in earlier periods of optimism—especially syndicated loans—are now under pressure and scrutiny. The softening economy and all special circumstances have especially affected borrowers in the retail, manufacturing, health care and telecommunication industries. California utilities, as you know, have also been under particular pressure. All of these, and no doubt other problem areas that are not now of foreseeable, require that both bank management and supervisors remain particularly alert to development.
We are fortunate enough that our banking system entered this period of weak economic performance in a strong position. After rebuilding capital and liquidity in the early 1990s, followed by several years of post-World War II record profits and very strong loan growth, our banks now have prudent capital and reserve positions.
In addition, asset quality was quite good by historical standards before the deterioration began.
Building on banking practices, we are in the process of improving both lending and supervisory policies that we trust will foster better risk management; but these policies could also reduce the pro-cyclical pattern of easing and tightening of bank lending and accordingly increase bank shareholder values and economic stability. It is an easy road, Mr. Chairman, but it seems that we are well along it.
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