WASHINGTON, Dec 20: US banks face a challenge in sustaining their strong performance of recent years as home buying slows and mortgage refinancing dries up, a government economist said on Friday.

National banks are expected to log their strongest average return on equity in 2003 since 1993, said Nancy Wentzler, the chief economist for the Office of the Comptroller of the Currency. Earlier this month, the Federal Deposit Insurance Corp., another bank regulator, reported record bank and thrift earnings in the third quarter of the year.

Bank profits have boomed despite the US economy’s slow recovery from recession in 2001 as Americans took advantage of low mortgage interest rates to buy houses or refinance home loans. But more recently, banks have generated earnings by cutting back on provisions for losses and from income from fees and services rather than interest income, Wentzler said at a briefing. Banks can cut back on what they set aside against potential losses without taking undue risks because loan default rates are low, Wentzler said.

But after a period of falling interest rates that made lending particularly profitable, banks have begun to see the gap between what they earn from lending money and what they have to pay to borrow it shrink, she said. Many consumers have locked in loans at low rates and paid off consumer loans at higher rates, she said.

We are watching very carefully the strategic decisions banks will make, where they will seek growth, Wentzler said.—Reuters