Cyclical Swing or Secular Slide? Why Have New England's Banks Been Losing Money?
Are the losses recently incurred by New England's banking industry symptomatic of chronic excess capacity that will depress the industry's profitability even after the region's economy recovers from its current recession? Or can the industry restore its profitability by ridding itself of the extraordinary costs resulting from its large overhang of bad loans? This article maintains that the industry is not "overbanked" and that its underlying profitability will eventually reemerge. In support of this contention, the article provides estimates of the "normal" profitability of New England's banking industry--what its average rate of return would have been in 1989 and 1990 given a "normal" incidence of bad loans. The article finds the normal rate of return of New England's banks to be similar to that of banks in the rest of the nation.
The article disputes the widespread belief that New England's high number of bank offices per capita is symptomatic of overbanking. This regional characteristic may instead reflect a conscious competitive strategy, encouraged by regulatory biases, to cater to New Englanders' preference for access and convenience in banking.