New from American Banker: The Index of Banking Activity

American Banker today introduces the Index of Banking Activity, a new monthly barometer of business conditions in the U.S. banking sector.

The index's initial reading of 54.4 indicates that the banking industry experienced a modest pickup in activity in June. The IBA is a product of American Banker's regular surveys of banking executives and is published in partnership with VantageScore Solutions. The initial index is based on 236 responses.

The IBA is a diffusion index. Readings above 50 in the composite indicate a monthly expansion of activity and readings below 50 point to contraction. A reading of 50 suggests that activity was unchanged month-to-month. The further from 50 a reading is, the stronger the indicated change.

The composite index is a simple average of readings on a range of indicators based on responses to survey questions on topics that include volume and pricing trends in commercial and consumer lending, loan balances outstanding, and deposit account activity. Executives are also asked about staffing levels at their institutions, as well as business and real estate conditions in markets where they do business. Every attempt is made to ensure that the breakdown of companies included in the executive panel are representative of the industry; when appropriate responses are weighted to bring the sample into line with the composition of the industry on a number-of-institution basis.

Values for each component of the index are equal to the percentage of responses indicating increased activity plus one-half of those indicating "no change." Component scores are then averaged to arrive at a composite (when calculating the composite, contrary indicators such as delinquencies are scored inversely — the component figure is subtracted from 100).

Factors that had the biggest impact on the initial IBA included commercial lending approvals, which registered a reading of 56.0, and commercial loan delinquencies, which registered a reading of 40.3 (delinquencies are a contrary indicator, thus a reading below 50 is considered positive.) Offsetting those was a very weak reading in commercial loan pricing, which had a score of 35.3, suggesting that lenders may have been reaching to capture market share.

In-market real estate conditions also contributed to the positive reading, coming in at a level of 60.0, a finding consistent with some recent data from mortgage and real estate industry trade groups suggesting that markets have bottomed out in certain parts of the United States.

Monthly readings will be presented as a time series that can be used to monitor the prevailing rate and direction of change in banking business cycles and eventually to benchmark whether an institution is operating in line with overall industry trends.