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Banks Face Increased Risks as Oil Price Slump Continues, Says Dallas Fed

Houston economy, Texas wage growth also subject of latest issue of Southwest Economy


Video: Business economist Edward C. Skelton discusses risks facing banks
For immediate release: June 16, 2016

DALLAS — Banks in Texas, northern Louisiana and southern New Mexico face increasing risks as oil prices remain low, according to the latest issue of the Federal Reserve Bank of Dallas’ Southwest Economy.

In “Risks Mount for Eleventh District Banks amid Energy Weakness,” financial industry analyst Kelly Klemme and business economist Edward C. Skelton note that banks in the Eleventh Federal Reserve District have increased their provision expense—money set aside to ensure against possible loan losses—because of concerns about energy-related credits.

District banks have also seen an uptick in the percent of loans that are noncurrent. This increase can be partially attributed to commercial and industrial (C&I) loans, which include loans to oil and gas companies. At the end of 2015, C&I loans accounted for 32 percent of district banks’ noncurrent loans, up from 19 percent in 2014.

“This trying environment follows a slight profitability decline and slowing loan growth among district banks in 2015. Even so, they outperformed their counterparts nationwide,” the authors say.

Also in this edition of Southwest Economy, business economist Jesse Thompson looks at the current state of the economy in Texas’ largest city. In “Houston Grinds to a Halt as Oil Industry Declines,” Thompson notes that Houston employment contracted slightly during the 12 months ended in March as the effects of the oil bust played out.

“It’s unclear whether Houston has entered a recession, although it’s a close call, according to the Houston Business-Cycle Index, which reflects employment, unemployment, real retail sales and wages,” Thompson says. The index showed the economy contracted during second quarter 2015, then returned to growth briefly before retreating again.

In “Once-Robust Wage Growth Stops as Texas Economy Slows,” assistant economist Amy Jordan and research analyst Emily Gutierrez examine the impact of the energy bust on Texas wage growth. Average weekly wages in the state have dropped below the national average for the first time in four years.

“The energy bust has brought tougher times to Texas and other energy-producing states,” the authors say. “The loss of high-wage jobs in energy and manufacturing has been indicative of labor market weakness and stagnating economic activity, causing some state wage measures to fall.”

The oil price slump has altered the composition of Texas employment as well, the authors say. While employment has continued to grow, gains have been in lower-paying industries. The state has lost higher-paying jobs, many of which had been in the energy sector.

In this issue’s “Spotlight” article, Gutierrez and senior economist Pia Orrenius look at recent immigration trends. In both Texas and the U.S., immigration from Central America is on the rise at a time when immigration from Mexico is declining, they say. In Texas, the Central American population more than doubled from 2000 to 2014.

This issue of Southwest Economy also includes an “On the Record” conversation with former Houston Mayor Annise Parker, who discusses both the challenges faced by Houston and its strengths, including a diverse, international population.

“In a city in which 1-in-4 residents is foreign born, the world is our marketplace,” she says. “Every language of business spoken anywhere in the world is spoken in Houston by native speakers who have cultural and communal connections into those countries.”

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Media contact:
Alex Johnson
Federal Reserve Bank of Dallas
Phone: (214) 922-5288
Email: Alexander.Johnson@dal.frb.org