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Banking

Introduction | National Banking Trends | State of the District | Spotlight: Non-CRE Lending | Spotlight: Small Business Lending


Introduction

By Michael Johnson, Senior Vice President
Supervision & Regulation
Federal Reserve Bank of Atlanta


Mike JohnsonIn the last edition of "ViewPoint," I talked about some positive emerging financial trends for Sixth District banks as we start to see more stabilization and even some earnings improvement. I was pleased to see that positive trend continue into the third and hopefully the fourth quarters of 2011. While I anticipate more bank failures into 2012, it's nice to see aggregate earnings turn positive and an improvement in asset-quality metrics across District banks, although they are coming off low levels. I think you'll agree that our regular State of the District report reflects the beginning of positive trends. Attached here you can see details on overall third quarter 2011 performance.

Despite these emerging positive signs related to financial performance, there is still the potential for strong economic headwinds. Our economy continues to be fragile and vulnerable to external shocks. This fragility is primarily why the European Union sovereign debt crisis is prominent on our radar screen. While direct exposures to EU sovereign debt by U.S. banks are minimal, liquidity contagion can occur through many channels, and a broad economic malaise would surely have an effect on U.S. banks.

Beyond issues in Europe, the state of residential real estate markets continues to be a major concern. The backlog of residential inventory needs to shrink before any material improvement can occur. Particularly for the Sixth District, I believe improvement, or at least broader stabilization, in residential real estate is a necessary precursor to a stronger economic and banking recovery.

Recent meetings across the spectrum of community, regional, and international banks suggest these issues, along with political and regulatory uncertainty and the search for new revenue sources, are on your mind as well. The confluence of the current environment and uncertain future highlight the ongoing need for a healthy investment in risk management infrastructure. Additional articles in this edition of "ViewPoint" address the need for balancing growth, including new product development with strong risk management.

Specifically, we hear from many of our banks that there are renewed plans to expand their commercial and industrial lending business (C&I). While C&I can be an excellent business if managed well, competition is fierce and a sound risk management culture needs to be in place before expansion. You can read some observations here related to striking this balance.

While we're on the topic of considering different lending opportunities, it seems fitting to also offer a summary of how the Small Business Lending Fund (SBLF) has played out and some corollary guidelines for small business lending.

I also want to highlight the recent adoption of two new final rules—the capital plan rule and resolution plan rule—under the Dodd-Frank Act that I believe all bankers should be aware of. Though these rules are generally applicable only to the largest banks, the key concepts can be applied more broadly. I sincerely hope you enjoy the upcoming holiday season and that, while 2012 will continue to be a year of significant change for the banking industry, it will bring change for the better. Once again, please let me know if you have any feedback and feel free to contact me at ViewPoint@atl.frb.org.

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