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Dallas Fed report: Restructured loans small part of average Eleventh District bank’s balance sheet
Report also spotlights new Dallas Fed trade indexes, fiscal health of states, Mexico’s banking sector

For immediate release: December 13, 2010

DALLAS—The latest issue of the Federal Reserve Bank of Dallas' Southwest Economyfeatures articles on Eleventh Federal Reserve District banks’ exposure to restructured loans, a new set of Dallas Fed trade indexes, the fiscal health of states and Mexico’s banking sector.

While the number of restructured loans in the Eleventh Federal Reserve District—Texas, northern Louisiana and southern New Mexico—has grown dramatically, it remains a small part of the average bank’s balance sheet, according to financial industry analyst Kory Killgo in “District Banks’ Exposure to Modified Loans Limited.”

A restructured loan is one in which a lender makes a repayment concession, such as reduction of interest or principal payments, because the borrower’s financial situation has changed, making it unlikely or impossible for the original terms to be met.

As of Sept. 30, banks in the Eleventh District held $2.8 billion in restructured loans, with almost $1.2 billion at least 30 days past due on their modified terms.

Despite the jump in restructurings, about 70 percent of banks in the Eleventh District and half of banks across the country reported no such loans.

In addition, the percentage of total restructured business loans failing to comply with modified terms in the Eleventh District and across the nation appears to be within the usual range since 2001, Killgo notes. The delinquency rate has reached similar levels before, even when restructuring activity was low, consistent with the view that banks are not restructuring loans less carefully now.

“These findings indicate that the current experience with loan restructurings in the district is less a cause for alarm and more a helpful response to some borrowers’ difficulties,” Killgo writes.

In “New Tool Gauges Impact of Exchange Rates on States,” senior research economist and advisor Keith Phillips introduces a new set of indexes that will allow analysts to more precisely identify the exchange rates that most affect a state’s economy.

A real trade-weighted value of the dollar (RTWVD) index weights the U.S. dollar exchange rate with various countries based on a state’s share of exports, Phillips states. It is a “real” measure because it is inflation adjusted.

The Dallas Fed will publish RTWVDs for all 50 states on a monthly basis in early 2011.

In “Poor State Finances Deepen Recessionary Hole,” senior research economist and advisor Jason Saving finds states, including Texas, are in the most challenging fiscal environment of the postwar era.

In fiscal 2010, after the federal government provided $63 billion in additional funding, 48 states wrestled with a total shortfall of $129 billion, Saving notes. While those states have made adjustments to balance their budgets, further cuts will be needed in 2011 and 2012.

Texas, which faced only modest fiscal pressure over the past two years, now confronts more significant headwinds, Saving says. The state is confronted with a shortfall for the next biennium estimated at up to $21 billion, or 11.5 percent of its $180 billion budget.

Despite the global financial crisis, banking penetration in Mexico doubled from 2007 to 2009, according to this issue’s “SpotLight.”

Though the proportion of Mexican households with a bank account almost doubled from 2007 to 2009, many still do not enjoy the full benefits of financial services, and small businesses are particularly hamstrung by a lack of access to formal credit.

In an “On the Record” conversation, Dallas Fed economist Anil Kumar says data show little evidence of panic trading in defined-contribution/401(k) accounts during the financial crisis.

“There was general concern that panicked workers nearing retirement would lose money by moving out of equities near the bottom of the market,” Kumar says. “Some of these worries appear overblown.”

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Media contact:
Alexander Johnson
Phone: (214) 922-5288
e-mail: alexander.johnson@dal.frb.org