Economic Review

Many observers expected 1983 to be a bad year for bank profits because of deposit deregulation, but F. Ward McCarthy Jr. shows in "A Review of Bank Performance in the Fifth District, 1983" that last year proved to be the most profitable of the last five. In this article, McCarthy examines the revenues and expenses of Fifth District banks in order to explain the significant improvement in performance.

McCarthy finds the most successful banks last year were the ones that had cost structures that were relatively sensitive to the level of interest rates. He forecasts that in the current year the strength of the economy, the growth in loan demand, and increases in interest rates will increase banks' gross return on assets. McCarthy also points out that if banks are to increase profitability in an environment of deregulation and rising interest rates, they must be able to contain interest expense and increase revenues from noninterest services.