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Cyclical swing or secular slide? Why have New England's banks been losing money?

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  • Robert Tannenwald

Abstract

Are the losses recently incurred by New Englands banking industry symptomatic of chronic excess capacity that will depress the industrys profitability even after the regions economy recovers from its current recession? Or can the industry restore its profitability by ridding itself of the extraordinary costs resulting from its large overhang of bad loans? This article maintains that the industry is not \"overbanked\" and that its underlying profitability will eventually reemerge. In support of this contention, the article provides estimates of the \"normal\" profitability of New Englands banking industry--what its average rate of return would have been in 1989 and 1990 given a \"normal\" incidence of bad loans. The article finds the normal rate of return of New Englands banks to be similar to that of banks in the rest of the nation. ; The article disputes the widespread belief that New Englands high number of bank offices per capita is symptomatic of overbanking. This regional characteristic may instead reflect a conscious competitive strategy, encouraged by regulatory biases, to cater to New Englanders preference for access and convenience in banking.

Suggested Citation

  • Robert Tannenwald, 1991. "Cyclical swing or secular slide? Why have New England's banks been losing money?," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 29-46.
  • Handle: RePEc:fip:fedbne:y:1991:i:nov:p:29-46
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    File URL: http://www.bostonfed.org/economic/neer/neer1991/neer691c.pdf
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    References listed on IDEAS

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    1. Stephen A. Rhoades, 1986. "The operating performance of acquired firms in banking before and after acquisition," Staff Studies 149, Board of Governors of the Federal Reserve System (U.S.).
    2. Lamoreaux, Naomi R., 1986. "Banks, Kinship, and Economic Development: The New England Case," The Journal of Economic History, Cambridge University Press, vol. 46(3), pages 647-667, September.
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