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Economic Conditions and Emerging Risks in Banking A Report to the ...

Source: www.fdic.gov
Topic: Economic Conditions

Sort Desciption: Our conclusion at present is that despite the weight of greater leverage economic conditions are. by and large favorable for consumer finances and ...

Content Inside: Economic Conditions and Emerging Risks in Banking A Report to the FDIC Board of Directors Division of Insurance and Research Risk Analysis Branch May 16 2005 Executive Summary The U.S. economy grew at its fastest pace in five years during 2004 boosted by a rebound in business investment and a resilient consumer sector. Economic growth is expected to moderate during 2005 and 2006 but should still remain at or above its two-decade average of 3.3 percent. While consumers are highly leveraged and face rising interest rates a steady job market is starting to boost wage and salary incomes. We expect that inflationary pressures will become more of a concern during 2005 thus prompting the Federal Reserve to continue to raise interest rates at an unhurried but deliberate pace. In short the U.S. should remain an engine of global economic growth in 2005. However downside risks include another surge in energy prices high consumer indebtedness the housing market and large international financial imbalances. While the bank earnings outlook remains positive it may be hard to duplicate the record profits recorded in 2004. Two engines of marginal earnings growthdeclining provision expenses and gains on the sale of securitiesmay not remain in place in 2005. Provision expenses are likely to stabilize or even increase given that loan performance may have already peaked for this cycle. Loan growth may also become a challenge as reduced mortgage refinancing activity may not be fully offset by steadily increasing commercial loan demand. Also anticipated increases in short- term interest rates could lead to a flattening of the yield curve and some compression in net interest margins particularly if loan growth slows. Although systematic risks for banks remain well out on the horizon near-term concerns include the possibility of faster-than-expected interest rate increases uncertainties over high consumer debt levels and settling of booming housing markets. In addition op ...

emerging risks in banking, economic conditions and emerging risks in banking

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