September 1990
Federal Reserve Bank of Dallas

Economic Review is no longer published in hard copy. It has been replaced by the all-electronic Economic and Financial Policy Review. Subscribe now and read the latest issue by visiting www.dallasfedreview.org.

Banking and the Economy: What Are the Facts?
Cara S. Lown

Cara S. Lown explores the banking industry's role in the economy and finds evidence supporting the idea that fluctuations in bank credit are related to fluctuations in economic activity. She also finds that bank asset holdings adjust before changes in economic activity and that the banking system's security-to-asset ratio strongly predicts economic growth. By analyzing terms of bank lending over the business cycle, Lown concludes that variations in lending terms are consistent with the argument that restrictions on bank credit adversely affect the economy. Lown's study reflects the renewed interest in the role of banking in the economy that has coincided with the failure of many banks and savings and loan associations.

Performance of Eleventh District Banks in 1989: Progress but not Profits
Robert T. Clair

Commercial banks in the Eleventh Federal Reserve District reduced their losses substantially in 1989 but still collectively reported a loss for the year. The improvement primarily resulted from increases in fee income. In addition, Eleventh District banks reduced their nonperforming loans and the costs associated with these loans. Despite the improvement, District banks still have relatively large holdings of nonperforming loans and repossessed real estate.

Balance sheets of Eleventh District banks show the effects of correcting the problems of low-quality assets. Charging off nonperforming loans reduced capital at District banks. In response to reduced capital, banks contracted their lending activity and invested in liquid assets. Asset growth has been very weak, and this growth resulted primarily from banks acquiring failed savings and loan associations.