CHICAGO -- The Federal Deposit Insurance Corp. is warning that the market for new banks in Michigan and Illinois is close to saturated and that start-up banks in those states could be hit hard if the economy slows.

Since the beginning of 1998, 35 new banks have opened in Illinois - primarily in metropolitan Chicago - while 28 have opened in Michigan, mostly in the suburbs of Detroit and Grand Rapids.

In its quarterly regional outlook for the Chicago region, the FDIC said start-up banks - defined as those established within the past three years - are more exposed to credit and interest rate risk than larger banks because their loan portfolios are more heavily concentrated in commercial real estate. Moreover, banks in this region also have a high proportion of noncore deposits, the report said.

Suzannah L. Susser, manager for the FDIC's Chicago region, said banking is similar to commercial real estate in that growth lags the business cycle. Like new office buildings built when demand for space is high, new banks come when demand for loans and banking services is high.

"They haven't experienced a downturn, so it makes you wonder what plans they have to react quickly to a downturn," Ms. Susser said.

But regulators and bankers in those states say the FDIC may be overreacting.

Scott D. Clarke, assistant commissioner at the Illinois Office of Banks and Real Estate, said he expects new banks to weather any economic downturns because most have strong management teams with years of experience at other banks.

Charie Zanck, chief executive officer of $100 million American Community Bank and Trust, in Woodstock, Ill., added that community banks generally know their customers more personally and, therefore, are less inclined to take risks.

"When you know with whom you're dealing and take time to understand your customers, you can reduce your economic risk," said Ms. Zanck, who left Amcore Financial Inc. to found American Community Bank, which opened in March.

As for market saturation, Mr. Clarke said although competition is heavy, Illinois considers market conditions before issuing a charter. The business plan submitted with the charter application must demonstrate that the bank will garner sufficient market share to survive, he said.

"We're looking for a business plan and management that can adapt to changing conditions," Mr. Clarke said.

Frank M. Fitzgerald, commissioner of Michigan's Office of Financial and Insurance Services, said that Michigan's economy is diverse enough that an economic downturn would not effect the entire state. For example, the western half of the state, which includes Grand Rapids, is not dependent on the auto industry, he added.

The commissioner said he expects to continue approving applications as long as demand is sufficient. He also pointed out that new banks are typically being formed by teams of businessmen and bankers that, when combined, make for strong management teams.

"We are encouraging of people who want to start banks, but we don't want anyone just to do it," Mr. Fitzgerald said.

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