FDIC QUARTERLY | AUGUST 13, 2024

FDIC Quarterly Report Provides Insight Into Potential Challenges for U.S. Metro Areas That Rely on Key Industries With the Possibility of Transition

As alternative forms of energy and lower carbon technologies emerge, the economies of areas with concentrations in industries exposed to these changes may undergo transition. The FDIC study “U.S. Industrial Transition and Its Effect on Metro Areas and Community Banks” explores industrial transitions in the United States between 1970 and 2019. The economies and demographics of many Metropolitan Statistical Areas (metros) changed significantly during the five-decade span. The national economy shifted away from the manufacturing sector, and industries such as steel and textiles were hollowed out by the forces of automation and globalization. In the study, the authors create a novel metric called a Transition Score to measure industrial transition across metros, use this metric to determine which metro areas were most affected by industrial transition, and compare the economic and banking performance of affected areas to areas with lower levels of transition.

The FDIC study finds that:

• Contracting industries were primarily concentrated in manufacturing, especially primary metal, machinery, and transportation equipment manufacturing, and were mostly located in the Northeast and Upper Midwest.
• Most metros with high Transition Scores typically lagged the nation in employment, income, output, and population growth from 1970 to 2019, while a few experienced outright declines in these measures.
• Higher industrial diversity, proximity to research universities, and strong in-migration seemed to mitigate the negative effects of industrial transition in some metros that outperformed national employment growth despite having high Transition Scores.
• Community banks headquartered in high-transition metros seem to have been adversely affected by employment and demographic challenges in their communities, but overall the differences between their performance and that of community banks in other areas were not as striking as the economic analysis would have suggested.
• Community banks in high-transition metros failed at lower rates overall than community banks in other areas, especially during periods of great economic and banking stress, such as during the savings and loan crisis (S&L Crisis) of the late 1980s and early 1990s and the Great Financial Crisis (GFC) of 2009 to 2012.
• High-transition metros had a lower rate of new bank activity than other metros, and banks in these metros had weaker branch and deposit activity than banks in other metro areas.
• Except for during the S&L Crisis and GFC, high-transition banks had overall weaker financial performance—measured in terms of profitability, asset quality, and loan growth—than other metro banks during the banking study period.
• While high-transition community banks as a group did not perform as well as their counterparts in other metros, a small subset of these banks achieved better financial and structural performance.

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