In other words

The FDIC announced last month that its insured institutions have continued to post strong financial results during the current 21-month expansion. According to a report released today in the Fall 2003 FDIC Outlook, faster economic growth in the second half of 2003, which has been accompanied by higher long-term interest rates, could pose new challenges for banking and thrift institutions - particularly those that specialize in mortgage lending.

The strong financial performance of the banking and thrift industries continues to be a bright spot in the U.S. economic outlook. Credit quality measures have improved since late 2002, while growth in consumer and mortgage loans has boosted profitability.

However, FDIC Chairman Don Powell cautions the industry against complacency in a changing economic environment. "The recent increase in long-term interest rates will present new challenges to some segments of the industry," said Powell. "Strategies that have worked well in the past may not be as successful in today's operating environment."

Mortgage lenders may face particular challenges as a result of higher interest rates. Mortgage origination volumes can be expected to decline along with refinancing activity, while the extension of asset maturities may tie up capital that otherwise could be deployed at higher interest rates. In addition, gains on the sale of securities and loans may be harder to come by in future quarters if current levels of interest rates persist into the future. However, FDIC analysts emphasize that mortgage debt historically involves lower levels of credit risk than most other asset categories, a fact that should mitigate overall levels of portfolio risk.

FDIC analysts also caution that insured institutions overall may find it more difficult to generate low-cost core deposits, as rising interest rates spur households to seek greater yields than those offered by bank deposits.

The report details several factors that have contributed to sluggish U.S. economic performance and additional job cuts during the current expansion. Weakness in the global economy, excess global capacity in manufacturing, strong growth in productivity, and the need to repair balance sheets and address governance concerns have all contributed to slow growth in business and a lack of interest in hiring new workers. However, many of these distractions are expected to fade over the next year, paving the way for a more rapid pace for U.S. economic activity.