I am pleased to welcome this distinguished panel of witnesses before the Banking Committee this morning: Alan Greenspan, Chairman, Federal Reserve Board; Jerry Hawke, Comptroller of the Currency; Ellen Seidman, Director, Office of Thrift Supervision; and Donna Tanoue, Chair, FDIC.
The purpose of today's hearing is to review the condition of the banking system of the United States. This hearing is not prompted by any triggering event or problem. Rather, the intention is to return to a prior practice of this Committee of holding periodic oversight hearings on the state of the banking system. By making this a regular event we would hope to elevate scrutiny of the system when times appear good and there may be a tendency toward complacency, as well as to defuse potential alarm when a hearing is held at a time that problems may exist. We would hope the regular scheduling of this hearing would be a useful discipline on the system and perhaps itself serve as a stabilizing influence.
It appears that the past decade of economic growth has significantly strengthened the condition of the U.S. banking system. In my view the enactment by Congress of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 in response to the thrift crisis, and the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 in response to the commercial banking problems of the late 1980s and early 1990s, contributed to that improved condition. The capital and regulatory standards put in place by those statutes helped the system to take advantage of the growing economy of the 1990s. Improved coordination of supervision by the regulators also made a contribution.
This morning we will hear from the regulators that the banking industry is better situated today to withstand a softening of the economy than it has been in the past. Banks have a greater variety of products and more geographic diversification in their assets. They have higher earnings, more capital, better risk management techniques, and higher asset quality than in the past.
Nevertheless they will also point out that asset quality problems have worsened for the past two years and loan loss provisions have increased substantially. Non-interest income of banks has been affected by a less robust economy and weaker stock market. Net interest margins declined for the sixth consecutive quarter to the lowest level since the first quarter of 1987. Loan losses continued to rise, with commercial and industrial loans accounting for more than half of the increase. The deterioration was concentrated among larger banks.
The manufacturing sector has also been slowing down, which affects commercial loan quality. Increasing numbers of employees are being laid off, which is adversely affecting the quality of consumer loans. Sectors such as telecommunications, technology, and agriculture, and the banks that service them, are facing serious economic challenges. And consumers are more highly leveraged today than at any other measured point.
The Committee will want to review all of these issues with the regulators this morning. Most fundamentally we will want to get an assessment from the regulators not only of how the system looks today, but how it may look six months or a year from now. The consensus forecast is that economic growth will pick up in the third and fourth quarters of this year and resume at a faster pace next year. If that is true, it will obviously have a beneficial impact on the banking system.
However, that outcome is far from assured. If the economy remains weak for the rest of this year, what impact will that have on the banking system? How well equipped is the system to cope with a weak economy as well as a growing economy? These are some of the threshold questions we will want to explore with the bank regulators today. I look forward to hearing their testimony.