as we approach the holidays
While recent economic news has left little doubt that the country is headed toward a recession – and indeed might already be in one – many of Rhode Island’s financial-services executives see reason for optimism.
The financial-services sector generally is in better shape to withstand a recession than it was during the last downturn 10 years ago, according to a number of Rhode Island’s leading financial executives. And the state’s economy, most agree, also is better able to shake off a recession than it was a decade ago.
“In general, the banking and financial infrastructure of the country is very sound,” said David F. Brochu, president of Progressive Financial Strategies, a financial-planning and investment-advisory firm in Providence.
“The current recession has more to do with correcting the excesses of the preceding 36 months and the temporary issues brought on by the tragedies of Sept. 11 than it does with any fundamental problem with our banking or financial systems,” Brochu said.
Most economists now say that the U.S. economy is in a recession, following the announcement earlier this month that the gross domestic product contracted for the first time in eight years by shrinking 0.4 percent in the third quarter. But many economists expect the recession to be short-lived, with a rebound projected by next spring.
“It’s a bonafide recession, but probably not a particularly deep or long one,” said Wayne Ayers, chief economist at FleetBoston Financial Corp.
Ayers said he expects the GDP to shrink 2.5 percent in the fourth quarter, followed by a one percent decline in the first three months of 2002. By the second quarter of next year, he foresees the economy snapping back with 3 percent growth. Ayers said that recovery likely will be fueled by consumer and government spending, but “certainly not by capital spending.”
Although projections of a relatively brief downturn and an otherwise healthy banking system have provided a reason for optimism, financial-services firms still find themselves in a very different environment than they were in 18 months ago.
Credit problems tend to emerge at about this time in the economic cycle, Ayers said. Indeed, many lending institutions began tightening credit standards for businesses a year ago, when a slew of technology related companies hit financial straits.
Banks will continue to be cautious, executives say. But that might prove difficult as commercial lending opportunities dry up, with fewer companies willing to make big capital investments.
“Banks will be taking a harder look at their own portfolios as well as the commercial lending deals that are available,” said Merrill W. Sherman, president and CEO of Bank Rhode Island. “Don’t get me wrong, banks are still very interested in lending money, and there are plenty of companies out there that need capital to exercise good, solid business plans.”
While lenders began seeing bad business loans more than a year ago, some executives say that the retail business could be next.
“If unemployment continues to increase we will see a rise in problem loans on the consumer side as well,” said Anne Szostak, chairman and CEO of Fleet-Rhode Island. Banks that have historically maintained high credit standards should fare
relatively well in a downturn, according to Robert F. Stoico, president and CEO of First Federal Savings Bank of America.
Stoico also said low interest rates should keep mortgage-refinance activity booming, while home-equity loans should also be brisk.
“Consumer credit, especially with home-equity loans, will increase as consumers prepare themselves for what might be a liquidity crunch for them if they were to lose their jobs,” he said.
But as the Federal Reserve Bank continues to trim short-term interest rates – which are at a 40-year-low following the Fed’s cut last week – banks risk losing market share to money market funds, executives say.
“There is a limit to how low rates can go before banks begin to lose deposits,” said Fleet’s Szostak. “We are watching that carefully.”
By and large, though, Fleet and other banks have seen across-the-board increases in core deposits such as savings accounts, as investors have pulled money out of equities and fixed-rate products in favor of liquidity. But with most U.S. economists expecting the recession to be short-lived, there could be a reversal of money back into equities next year.
(Photo by Al Aleixo)
