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Introduction | Spotlight: Banking Outlook Conference | Spotlight: Net Interest Margin Performance, Part II | State of the District | National Banking Trends


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

Mike Johnson Welcome to the first quarter 2013 edition of Financial Update's "ViewPoint." With 2013 under way, it's a good time to look forward to the potential challenges that may lie ahead. To this end, we thought it would be useful to review major themes that emerged from our recent 2013 banking outlook conference held at the Federal Reserve Bank of Atlanta on February 28. First, however, we take a look at recent banking trends in our recurring State of the District article. Also in this edition of "ViewPoint," we revisit the topic of interest rate risk, which remains under pressure during this prolonged low interest rate environment, and we briefly discuss the recently announced stress test results.

State of the District
The year-end was somewhat of a mixed bag of results for Sixth District banks, with general improvement at a slow but steady pace. Uncertainty affected banks on a regional basis as loan growth slowed in the Southeast while accelerating on a national level. Still, asset quality continues to improve. Despite charge-offs increasing in the fourth quarter, as expected, noncurrent loans stayed below their peak from three years ago. The earnings story remains centered on cost containment. Return on average assets (ROAA) improved from the prior year but declined slightly from the prior quarter, typical in the last quarter given that banks attempt to charge off any remaining asset quality issues at year-end. In short, the banking industry has improved but more healing opportunities remain.

Banking outlook conference
The Federal Reserve Bank of Atlanta hosts an annual banking outlook conference; this year's theme was "Navigating the New Banking Landscape." The conference was well attended and streamed live over the Internet for the first time. With excellent speakers and comprehensive content, this may have been our best conference yet. We discussed a wide array of issues facing the banking industry, and they even let me participate on one of the panels! A few themes prevailed during the day's discussions, including gradual improvements in underlying economic conditions and residential real estate markets, the impact of new regulation on compliance costs, growing reputational risk issues including the increasing threat of cyberattacks, and operational challenges faced by banks going forward. For the first time in many years, credit quality challenges seemed to take a back seat to revenue and expense considerations.

You can still download presentations or watch video clips of the conference.

Interest rate risk
This quarter, we feature the second installment of our series on interest rate risk (you can still read the first installment here). The low interest rate environment has created a challenging operating environment for many banks. Net interest margins have fallen to multiyear lows, which provide less net interest income to cover banks' operational expenses. In response, many banks are changing their balance sheet durations by extending asset durations in an attempt to capture additional yields, while decreasing their liability durations in an attempt to reduce costs of interest-bearing deposits. Whether from continued margin compression as a result of low interest rates or potential asset-liability mismatching once interest rates rise, interest rate risks have grown and will continue for the banking sector.

Recent supervisory developments
The summary results of the Dodd-Frank Act stress tests (DFAST) were released on March 7, followed by the release of the comprehensive capital analysis and review (CCAR) stress test results on March 14. This is the fourth round of CCAR stress tests conducted by the Federal Reserve since the tests began in 2009, but it is the first year that stress tests have been conducted using the Dodd-Frank rule. DFAST and CCAR differ in the proposed capital actions included in the scenarios.

Both the DFAST and CCAR results reveal continued improvement in the collective capital position and ability of the 18 largest U.S. bank holding companies to weather an extremely adverse hypothetical economic scenario, including a peak unemployment rate of 12.1 percent, a drop in equity prices of more than 50 percent, a decline in housing prices of more than 20 percent, and a sharp market shock for the largest trading firms. Under this scenario, the aggregate hypothetical post-stress capital ratio exceeded the actual aggregate tier 1 common ratio for the 18 firms at the end of 2008. From the end of 2008 to the fourth quarter of 2012, actual tier 1 common equity has increased from $393 billion to $792 billion. The stronger capital position is due in part to substantially lower capital distributions by bank holding companies than before the financial crisis.

On March 14, the Federal Reserve also announced the results of its review of capital plans submitted by the 18 CCAR firms in accordance with the capital plans rule. Both qualitative and quantitative factors were considered. The capital plans of 14 of the 18 CCAR companies were approved. Two companies received conditional approval of their plans and two firms received objections. After the Federal Reserve objects to a capital plan, the institution may only make capital distributions with prior written approval.

You can see additional detail regarding the results of DFAST and CCAR 2013 here and here.

Regulatory priorities for 2013
The Board continues to work with Congress and the other financial regulators to meet all the statutory requirements of Dodd-Frank. Final rules are pending on proposals to implement the Volcker rule and Basel III. The Board is accepting comments on proposals regarding enhanced prudential standards for the oversight of the U.S. operations of foreign banking organizations and on rules regarding the provision of Federal Reserve accounts and services for systemically important Financial Market Utilities.

The Consumer Financial Protection Bureau recently released guidance on two key components of Dodd-Frank mortgage reforms: the ability to repay and qualified mortgage standards. The adoption of this guidance clears the way for financial regulators to continue with the implementation of other mortgage-related proposals, including the risk retention rule for asset-backed securities. You can find additional information on the Board's supervisory expectations for 2013 in testimony by Federal Reserve Governor Daniel Tarullo.

As always, I look forward to hearing from you, and I hope 2013 continues to be a positive year for the industry. Please share your feedback with me at

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