Cleveland Fed researchers on regional bank health; financial stress; economic outlook; bank capital

In a recent Economic Commentary, Federal Reserve Bank of Cleveland researchers Lakshmi Balasubramanyan and Timothy Bianco examine the health of regional banks—defined as banks and bank holding companies with assets of $10 billion to $50 billion—between 2008 and 2013. Using confidential supervisory ratings as their measure of bank health, the researchers find that lower ratings were correlated with:

• Increases in residential real estate, commercial real estate, and commercial and industrial loans
• External factors such as a rising unemployment rate and a decreasing term spread (that is, a flatter or inverted yield curve). The researchers say a negative spread suggests that investors are pessimistic about future economic conditions.

According to the researchers, regional downturns in the real estate market, or in important industries such as autos or oil, can have a disproportionate impact on regional bank health. And since regional banks are a source of credit for households and firms, a decline in their financial condition can then further weaken regional economic conditions.

Read The Often-Ignored Regional Banking Sector

The Cleveland Financial Stress Index, in Grade 2 (a historically normal stress range) for most of the fourth quarter of last year, has consistently trended up since the beginning of 2015, moving into Grade 3 on January 19.

An indicator of systemic stress, the CFSI tracks stress in six types of markets: credit, equity, foreign exchange, funding, real estate, and securitization.

Read Tracking Recent Levels of Financial Stress

Speaking at an Ohio Bankers League economic summit on February 4, Cleveland Fed President and CEO Loretta J. Mester and Senior Vice President of Banking Supervision Steve Jenkins revealed what they expect for the economy and for bankers who face new capital rules.

Mester, keynote speaker for the summit, said, “There are accumulating signs that the economy is building momentum and that, this time, a pickup in speed will be sustained because the underlying fundamentals have improved.”

During a panel discussion about ongoing capital requirements for banks, thrifts, and holding companies, Jenkins surprised some in attendance when he noted that Ohio banks—and most community banking organizations across the country—already appear to meet the higher capital standards that are being phased in over the next several years to improve the quantity and quality of bank capital.

Read Optimism at the OBL

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.218.1892