Profits and balance sheet developments at U.S. commercial banks in 2001

Despite the economic slowdown, the profitability of the U.S. commercial banking industry remained high in 2001. Although the weak economy contributed to a sharp rise in provisions for loan and lease losses, those losses were offset in large part by an advance in realized gains on investment account securities as banks' portfolios benefited from declining short- and intermediate-term market interest rates. Profits were also supported by reductions in noninterest expense, as large merger-related charges in 2000 were not repeated last year. Lower short-term interest rates also spurred a rapid increase in core deposits, which provided banks with plentiful, low-interest-rate funding. The expansion of bank balance sheets was slower in 2001 than in the preceding year, as weaker economic activity held down growth in loans to businesses. Loans to households advanced relatively rapidly, though at a somewhat slower pace than in 2000. An increase in the share of banks' portfolios consisting of mortgage-backed securities issued by government agencies, which have lower risk weights than loans, together with continued strong earnings, contributed to an increase in risk-based capital ratios.