Central Banker

CB Spring 2013

Central Banker is a quarterly overview of Fed policies, initiatives and news affecting financial institutions in the Eighth District and across the United States.

Issue link: http://read.stlouisfed.org/i/255760

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T h e F e d e r a l r e s e r v e B a n k o F s T . l o u i s : C e n T r a l T o a m e r i C a ' s e C o n o m y ® | s T l o u i s F e d . o r g C e n T r a l n e w s a n d v i e w s F o r e i g h T h d i s T r i C T B a n k e r s SPRING 2013 By Gary Corner and Andy Meyer T he total volume of loans held by community banks peaked in 2008 and dropped during the finan- cial crisis and Great Recession. Total loans bottomed out in 2011 and, as of December 2012, have only recovered to a level roughly 10 percent below their 2008 peak. During this period, both demand and supply factors undoubtedly played roles in the change in bank lend- ing. In the years before the crisis, the perception of ever-rising residential and commercial real estate prices caused loan demand to soar. On the supply side, some (though cer- tainly not all) banks relaxed assorted underwriting standards, accepting applicants with little equity or with overly optimistic property apprais- als and income forecasts. During the financial crisis, Great Recession and sluggish economic recovery, business and household loan demand weakened considerably as firms and households cut spending, increased savings and increased balance sheet liquidity. On the supply side, banks that had relaxed some standards naturally raised them to more sustainable levels in an effort to reduce their risk and to limit further losses. Thus, both demand and supply factors contributed to the drop-off in lending, and the relative contribution of each factor is difficult to distinguish. Community Bank Lending during the Financial Crisis Community Bank Lending Trends Quality loans and local deposit-tak- ing are the foundation of community bank profits and growth. Despite the financial crisis, healthy community banks still had an incentive to maxi- mize profits by lending, as long as risk factors were balanced. As illustrated in Figure 1 above, small commu- nity banks across the Eighth Federal continued on Page 6 F e aT u r e d i n T h i s i s s u e The Global Battle Over Central Bank Independence | Can FASB Get Loan Loss Accounting Just Right? figure 1 Total Loans 60 70 80 90 100 110 120 130 Index (2007 = 100) 2007 2008 2009 2010 2011 2012 Eighth District banks with assets less than $1 billion Eighth District banks with assets $1 billion-$10 billion U.S. banks with assets less than $1 billion U.S. banks with assets $1 billion-$10 billion KeY

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