What Can Banking Conditions Tell Us About the Economy?

January 8, 2020

Every quarter, we look at the operating environment for banks in our nine-state District. The practice also helps shed light on issues affecting the performance of the Western U.S. economy. Here are some observations based on data from the third quarter of 2019.

  • Bank profits moved little on a quarterly basis as declining interest rates and a shift in asset mix weighed on bank net interest margins. Profits did inch higher year-over-year.
  • Annual net loan growth decelerated further, driven by cooling bank lending in California, Washington, and Idaho, in particular. That said, it continued to outpace the national average, and credit problems remained minimal.
  • While lower loan-to-asset ratios contributed to weaker quarterly bank margins, they also benefitted banks’ on-balance sheet liquidity and risk-based capital ratios, on average.
  • Quarterly job growth in the West slowed modestly, but continued to trend upwards from a mid-2018 trough as the region shrugged off trade tensions and slowing global growth.
  • Annual home price appreciation rates were steady-to-higher compared to 2Q19 across most District states. Lower long-term interest rates boosted housing demand, affordability measures, and the issuance of building permits.
  • Commercial real estate fundamentals remained healthy in most District markets. However, price appreciation slowed across most property types.
  • A discussion on wildfire risks to banks notes that power shutdowns have amplified operational risks to banks and thrifts, including the potential for liquidity and credit implications.

For more detail about these issues and an overview of commercial bank performance in Q319, read the latest First Glance 12L (pdf, 606.36 kb).

To stay on top of key indicators of banking and economic conditions in our District, subscribe to First Glance 12L.

The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.