Meet the Author

Joseph G. Haubrich |

Vice President and Economist

Joseph G. Haubrich

Joseph Haubrich is a vice president and economist at the Federal Reserve Bank of Cleveland, where he is responsible for leading the Research Department's Banking and Financial Institutions Group. He specializes in research related to financial institutions and regulations.

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Meet the Author

Kent Cherny |

Research Assistant

Kent Cherny

Kent Cherny was formerly a research assistant in the Research Department of the Federal Reserve Bank of Cleveland.

Meet the Author

Saeed Zaman |


Saeed Zaman

Saeed Zaman is an economist in the Research Department of the Federal Reserve Bank of Cleveland. His current research focuses on inflation measurement and forecasting, including nowcasting methods, and he contributes to the development of macroeconomic forecasting and policy models at the bank. His research interests also include inflation and prices, macroeconomic forecasting, monetary policy, and banking and financial institutions.

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Economic Trends

Fourth District Bank Holding Companies

Joseph Haubrich, Kent Cherny, and Saeed Zaman

A bank holding company (BHC) is a legal entity that owns a controlling interest in a commercial bank, often in addition to other financial and nonbank subsidiaries. BHCs range in size, but all are regulated by the Federal Reserve System (each BHC is supervised by the Federal Reserve Bank in the region where the BHC has its headquarters).

Of those BHCs with consolidated assets of more than $1 billion, 20 were headquartered in the Fourth District, including 4 of the top 50 BHCs in the United States, as of the fourth quarter of 2008.

Annual asset growth of Fourth District BHCs was 3.5 percent last year, down from 2007’s 5.1 percent growth rate. With regard to national trends, the commercial banking sector saw a reduction in total assets during the fourth quarter of 2008, as the financial crisis prompted banks to deleverage or slow their rate of asset growth. Nevertheless, total assets nationally and in the Fourth District did grow over the course of 2008.

The landscape of Fourth District BHCs has changed slightly since our last update. In particular, the Pittsburgh-based bank PNC closed on its purchase of Cleveland-based National City during the fourth quarter of last year, becoming the eighth largest BHC in the country (with assets of $291 billion). Fifth Third, Key, Huntington Banks, and other large BHCs located in the District, are also among the top 50 U.S. BHCs. The assets of all Fourth District BHCs account for 4.6 percent of the nationwide total.

Banks’ aggregate return on assets fell below zero during 2008, as the industry  continued to grapple with souring loans and a worsening economic climate. In the Fourth District, bank holding companies booked a −0.37 percent return on assets. The net interest margin (NIM)—the spread between the rate at which banks lend and the rate at which they borrow—fell to 2.33 percent from 2.89 percent in 2007. Notice that the NIM’s decline accelerated during 2007 and into 2008, roughly tracking the fall of short-term interest rates. Since September 2007, the Federal Reserve has lowered the target federal funds rate from 5.25 percent to a range of 0.00 percent −0.25 percent. Although banks benefit from a lower borrowing cost as short-term rates decrease, long-term rates have also stayed relatively low by historical standards, and banks also base many of their loans (especially consumer loans) on the prime rate, which is tied to the fed funds rate.

Another indicator used to measure the strength of earnings is the level of income earned but not received. If a loan allows the borrower to pay an amount that does not cover the interest accrued on the loan, the uncollected interest is booked as income even though there is no cash inflow. The assumption is that the unpaid interest will eventually be paid before the loan matures. However, if an economic slowdown forces an unusually large number of borrowers to default on their loans, a bank’s capital may be unexpectedly impaired. The levels of Fourth District BHC income earned but not received ticked up modestly from 2005 to 2007 but fell back to 2004 levels (0.46 percent of assets) in 2008.

Real estate continues to be the dominant loan class for Fourth District BHCs, although there was a clear decrease in the portion of assets represented by real estate loans in 2008. Real estate fell to 36.6 percent of assets, from 40.0 percent in 2007. At the same time, commercial loans and mortgage-backed securities saw a slight rise in their representation in loan portfolios. It is not clear whether these increases were the result of concerted portfolio rebalancing at banks; equally likely is the possibility that the rebalancing occurred naturally as the volume of real estate originations (and loan volume generally) slowed during 2008.

Deposits became an increasingly important source of funding for banks in 2008, particularly in the fourth quarter, as individuals shifted assets into savings in a flight-to-quality move, and for liquidity. Savings and small time deposits accounted for 57.3 percent of BHC liabilities, an 8.0 percent increase from 2007. Transaction deposits saw a slight decline of 0.67 percent of liabilities, and large time deposits increased to 8.83 percent of liabilities from 7.70 percent in 2007.

Problem loans are loans that are past due for more than 90 days but are still accruing interest payments, as well as loans that are no longer accruing interest. Last year, problem real estate loans hit 2.75 percent of all loans–nearly double the 1.41 rate in 2007. Consumer (credit card, installment) loans and commercial loans also became problematic at a much faster rate in 2008 with the effects of the recession. Approximately 1.53 percent of commercial loans and 0.86 percent of consumer loans were problematic in 2008, up from 0.78 percent and 0.55 percent in 2007, respectively.

BHCs in the Fourth District also charged off more souring loans in 2008 than in previous years. Consumer loan charge-offs, at 1.50 percent, were the highest of the three categories shown. Bad credit card debt, a component of consumer loans, likely accounts for most of this category. Credit card lines were clearly hit by worsening economic conditions, and banks also tend to charge off problematic credit card lines at a faster rate than secured commercial or real estate loans.

Capital is a bank’s cushion against unexpected losses. The risk-based capital ratio (a ratio determined by assigning a larger capital charge on riskier assets) for Fourth District BHCs saw a dramatic rise from 10.5 percent of assets in 2007 to 16.5 percent in 2008. During 2008, asset growth slowed, and many banks sought additional capital, including from the government’s TARP program. The leverage ratio stayed relatively flat at 9.7 percent (from 9.2 percent in 2007).

An alternative measure of balance sheet strength is the coverage ratio. The coverage ratio measures the size of a bank’s capital and loan loss reserves relative to its problem assets. This ratio has been falling since 2006, and in 2008, BHCs held about $5.52 of capital and loss reserves per dollar of problem assets. Last year, that number was $8.15.