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The outlook for the U.S. banking industry : what does the experience of the 1980s and 1990s tell us?

  • Kenneth Spong
  • Richard J. Sullivan

In many respects, the 1980s appear to be the worst decade in banking since the Great Depression, while the 1990s could be rated as the best. Over 1,100 commercial banks failed or needed FDIC assistance during the 1980s, and significant parts of the thrift industry became insolvent and had to be resolved, costing taxpayers $125 billion. In contrast, the banking industry began a dramatic recovery in the first half of 1990s and has recently achieved record profitability, extremely low levels of loan losses, and the highest capital ratios since the early 1940s. As a result, the number of banks failing during the second half of the 1990s has averaged only four or five per year.> These two divergent experiences raise the question of what will happen during the next decade. One obvious forecast would be for recent favorable trends to continue, particularly since banks and the underlying economy have shown remarkable strength and resiliency in their recovery from the 1980s. The current environment is not without some concerns, however. Consumer debt has reached record levels, and a few sectors, such as agriculture, show signs of weakness. Also, bank supervisors have recently voiced concerns that bank credit standards are weakening. Moreover, the financial environment is changing rapidly with innovation, bank expansion and consolidation, and competition from new sources, thus opening the door for new problems.> Spong and Sullivan examine the outlook for the banking industry over the next few years, focusing on whether the prosperity and tranquility of the 1990s will continue, or whether the industry faces a return of the banking problems of the 1980s. They find that, because banks are in much better shape now than in the 1980s, the industry is unlikely to face the depth of problems suffered in the 1980s even if the economic environment becomes less favorable. Still, it appears that banks will be hard pressed to match their recent record performance.

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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (1999)
Issue (Month): Q IV ()
Pages: 65-83

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Handle: RePEc:fip:fedker:y:1999:i:qiv:p:65-83:n:v.84no.4
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