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St. Louis Fed's Central Banker Delves Deeper Into Bank Failure Characteristics; Demographics of Small Bank Lending


ST. LOUIS — The spring 2010 issue of Central Banker, the Federal Reserve Bank of St. Louis' the quarterly banking publication, delves deeper into failing bank characteristics and the demographics of small bank lending.  The online version also offers a video from St. Louis Fed economist Bill Emmons on several new Federal Accounting Standards Board (FASB) accounting standards.  The issue’s feature articles include:

  • Earliest Indicator of Bank Failure Is Deterioration in Earnings –  Author Yadav Gopalan finds that while weakened or deteriorating asset quality is the primary driver of bank stress, the recognition of this stress has historically first shown up in earnings performance.  In the case of an institution that ultimately fails, this stress is next reflected in a bank’s management rating, as bank management is unable to reverse the negative trends in earnings and asset quality.  Capital ratios, while important, tend to deteriorate well after the bank’s condition has weakened.
  • The Demographics of Decline in Small-Business Lending – The demographics of institutions in the small-loan business have changed dramatically over the past decade.  Authors Gary Corner, senior banking examiner, and Rajeev R. Bhaskar, senior research associate, examine how most of the growth in outstanding small-business loans has come from the largest banks (banks with greater than $50 billion in assets). One explanation for the trend may be the advent of small-business scoring models in the mid-1990s. Credit-scoring models automate much of the human involvement of the loan application process and, thereby, speed up the underwriting process.
  • Two Steps Forward, One Step Back for District Banks in Fourth Quarter”  –  After two straight quarters of slight improvement, profitability at Eighth District banks dipped in the fourth quarter of 2009, according to economist Michelle Clark Neely. Return on average assets (ROA) declined 9 basis points to 0.16 percent because of increases in net noninterest expenses and loan loss provisions.   For U.S. peer banks (those with assets of less than $15 billion), the fourth quarter profitability ratio was a “good news, bad news” story. The good news was that ROA rose 2 basis points; the bad news was that it was still negative (-0.28 percent) as the industry continued to rack up losses.  Also, for both District and national peer banks, the results were once again better for smaller institutions: District banks with average assets of less than $1 billion earned 0.49 percent on average assets, while similar-size banks elsewhere earned just 0.01 percent. As with the slightly larger banks, ROA declined between the third and fourth quarters.


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With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, provides payment services to financial institutions and the U.S. government, and promotes community development and financial education.