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Banking

ViewPoint

Introduction | Spotlight: Housing Market Overview: Challenges to the Housing Recovery | Spotlight: A Guide to Trust Preferred Securities | Spotlight: Conference Looks Ahead to Banking's Next Chapter | State of the District| National Banking Trends

Introduction

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

Mike JohnsonAfter a seemingly endless winter, spring has finally arrived and, with that, comes our first edition of Financial Update's "ViewPoint" for 2014. I am pleased to report that banks in the Sixth District continue to improve across several metrics. To be sure, challenges remain, and many of these challenges were discussed at our recent annual banking outlook conference, which we provide a recap in this edition of "ViewPoint." We also explore in some more detail the potential impact of expiring TruPS deferral periods and recent regulatory changes in the residential mortgage market. First, however, we take a look at recent banking trends in our recurring State of the District article.

State of the District
Community banks became increasingly optimistic toward the end of 2013, and for good reason. Measures of asset quality problems, such as noncurrent loans to total loans, were approaching historical norms while the share of unprofitable institutions fell to only 18 percent. Banks are also encouraged about loan growth as the amount of loans on their balance sheets grew in the fourth quarter, with strong loan pipeline growth as well. The road to recovery is continuing.

Trust Preferred Securities (TruPS)
Although there have been significant declines in the number of institutions reporting TruPS, the payment deferral periods for many of the remaining institutions have expired or are approaching expiration over the next few years. Bank holding companies (BHCs) that are unable to make the required catch-up payments face a potential default on their outstanding TruPS. Subsequently, it is vital for these BHCs to have a plan in place for dealing with the expiration of the deferral period and to address the situation earlier rather than later. Communication with appropriate supervisory authorities is also important and encouraged and can help avoid unforeseen or unanticipated issues that could become problematic.

Challenges facing the housing recovery
Despite some positive trends, the outlook for the housing market has remained mixed over the past year. After increasing for more than two years, home sales began to decline on a year-over-year basis in October 2013 as modestly rising interest rates, rapidly increasing home prices, and uncertainty surrounding the partial federal government shutdown combined to discourage prospective home buyers. Time will tell what the full effect of the qualified mortgage (QM) rules will be. For now, it appears that the new rules may have effects that are different for smaller institutions than larger ones. Also, although non-QM loans will continue to be made, it is not clear to what extent certain segments of the market—or which segments—will benefit. Regardless, it is expected that non-QMs will, in many cases, be challenging to obtain and could be more expensive. Bottom line, trends are generally up but headwinds remain.

Looking back at the banking outlook conference
On February 27, we hosted our annual banking outlook conference, which was attended by more than 100 bankers, regulators, and industry analysts. As the banking industry recovers from the financial crisis and adjusts to the new regulatory environment, participants explored a range of topics including the economic and policy environment, recruiting for the future, and the industry's next chapter. If you missed the conference, you can still view video presentations on our website, along with a few additional presentations where some of our presenters take a deeper dive into the challenges confronting the industry. I'll take this opportunity to encourage you to register for the 2015 banking outlook conference; we will provide you with registration details here in "ViewPoint" later this year.

Regulatory developments
The first quarter brought several significant developments on the regulatory front. In January, the banking agencies issued clarification of the Volcker Rule, allowing institutions to continue to hold and sponsor collateralized debt obligations backed primarily by bank-issued trust preferred securities. In February, as required by Dodd-Frank, the Board approved enhanced prudential standards for capital, liquidity, and risk management for BHCs with $50 billion or more in total assets and foreign banking organizations (FBOs) with $50 billion or more in non-branch U.S. assets. U.S. BHCs have until January 1, 2015, to comply; FBOs must be in compliance by July 1, 2016.

The final rule also requires publicly traded U.S. bank holding companies with total consolidated assets of $10 billion or more to establish enterprise-wide risk committees. In March, the banking agencies issued supervisory guidance on Dodd-Frank Act company-run stress testingfor companies with between $10 billion and $50 billion in total assets. These companies will report the results of their first company-run tests on March 31. Stress-testing summary results for comprehensive capital analysis and review will also be released.

As always, I look forward to hearing from you, and wishing you the best for a profitable 2014. Please share your feedback with me or suggest future "ViewPoint" topics at ViewPoint@atl.frb.org.

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