Commodity Prices May Hurt Banks
WASHINGTON (AP) -- Federal bank regulators are keeping a
watchful eye on financial institutions that lend to businesses affected by the slump in prices for farm and industrial commodities.
If the price slide persists, the lending institutions could suffer losses, the Federal Deposit Insurance Corp. warned in a report issued Monday.
''The FDIC is carefully monitoring the effects that low prices are having on local economies that
depend heavily on commodity industries,'' said Donna Tanoue, who heads the deposit insurance
agency. ''We know from experience that local economic adversity has the potential to result in
problems'' for banks and thrifts.
Prices for corn, soybeans, wheat and other crops have been depressed for the second year in a row
because of huge harvests worldwide and the recent economic crises in Asia and Russia, which also
have helped pushed down prices of chemicals, steel, oil and natural gas, though the energy
commodities have since rebounded.
''We've had a tremendous drop in some of these commodity prices,'' said Carl Tannenbaum, senior vice president and chief economist at LaSalle Banks in Chicago.
The FDIC's Regional Outlook report for the third quarter notes that a similar price slump in the
1980s triggered a ''rolling recession'' that spread through the Plains states and the oil producing
regions of the south-central and western states. The decline of farm land values starting in 1981
contributed to the failure of hundreds of banks in agricultural regions between 1984 and 1990, while
falling oil prices in the mid-1980s played a role in the failure of banks and thrifts in Texas, Oklahoma
and Louisiana.
This time, the report says, financial indicators show that ''the level of credit risk (for banks and
thrifts) associated with commodity industries may be on the rise.''
''There are signs of rising credit losses among local (financial) institutions in counties with the highest
concentrations of agriculture and oil and gas extraction,'' the report says. ''A continuation of today's weak pricing picture in these industries has the potential to result in higher credit losses for (financial) institutions during the next few years.''
While banking problems of the magnitude of the 1980s are not expected this time, persistent low
commodity prices, coupled with uncertainty about future federal farm programs, pose ''significant
risks'' to banks in farm areas, the FDIC says.
At the same time, because those banks have higher levels of capital and reserves against loan losses
than in the 1980s, they appear to be better prepared to absorb the risk, the report suggests.
''I don't think the worst case will prevail,'' Tannenbaum said in a telephone interview. Banks in the
region have set aside more money to cover potential losses and agricultural demand in Asia has
started to improve, he said.
So far, the incidence of defaults on bank loans in the region has been minimal, Tannenbaum added.
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