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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

Conference Looks Ahead to Banking's Next Chapter

More than 100 bankers and regulators gathered at the Federal Reserve Bank of Atlanta on February 27 for the Supervision and Regulation Division's annual Banking Outlook Conference.

A full day of presentations and panel discussions explored a range of issues related to this year's conference theme: "Banking's Next Chapter: Challenge, Opportunity, Risk." The conference drew top experts to discuss many subjects including:

  • Economic conditions and the policy environment
  • Interactions between banks and the Consumer Financial Protection Bureau
  • Cybersecurity
  • Recruiting for the future

Economic conditions improving, housing price gains to slow
Although the housing market has turned the corner, it won't be back to normal—at least in terms of total housing construction—until 2016, said Doug Duncan, senior vice president and chief economist at Fannie Mae. Further, the recovery will likely be marked by fits and starts. He expects sales of existing homes to be relatively flat, while new home sales strengthen.

Last year's rising home prices will give way to somewhat slower appreciation in 2014, Duncan predicted. The previous year's increases were largely driven by supply-side factors such as low levels of new home construction and an influx of institutional investors into the housing market. Those factors, along with millions of underwater homebuyers, constrained the supply of homes for sale, he explained in an interview with the Atlanta Fed.

New mortgage regulations, such as the qualified mortgage rule, are also having an impact on the housing market, he said. This topics was a common one during the conference. "In the very near term, people are still adjusting to exactly what that rule means," said Duncan. Citing Fannie Mae research, he suggested that about 5 percent of loans made in 2012 wouldn't have met the standards, which, among other things, requires lenders to make a good-faith determination of a consumer's ability to repay their mortgage loan. However, he added that because households can make adjustments, such as taking out a smaller loan or changing the loan terms, "it's not clear if that entire 5 percent would have been affected by the new rule."

Duncan's take on the broader economy suggests that 2014 will be a year in which government actions take a backseat to the private sector. His team forecasts that U.S. gross domestic product will grow 2.9 percent this year. Downside risks to that forecast included weak productivity and job growth, he said.

Online retailers, telecommuting influence CRE demand
The changing labor market and the rise of e-commerce are influencing demand for different types of office and commercial space, explained Sam Chandan, president and chief economist at Chandan Economics. For one, consumers are doing more of their shopping online, and that is affecting some retail categories more than others. Electronics and bookstores have been especially hard hit, while other product categories, such as grocery stores, have not felt as much pressure from online retailers, Chandan said. These changing trends in the demand for commercial space require investors to look ahead to what the "best and highest" potential use of those properties might be, he noted.

Demand for office space is also changing as more workers telecommute. Working from home is more of a complement than a substitute for in-office work, Chandan explained. Still, this and other trends—such as changes in the types of jobs that are being created—are affecting the amount of space demanded per office-using employee. "There's been a shift away from financial services and from legal services in job creation trends, and that is lending itself to a smaller footprint for office demand," he said.

Consumer protection, healthy banks can coexist
In the day's keynote speech, Consumer Financial Protection Bureau (CFPB) Deputy Director Steven Antonakes said that the agency's consumer protection mandate is not in conflict with a healthy, profitable financial system. Indeed, "consumers benefit from a healthy, competitive, and diversified financial services system through greater access to credit and competitive pricing," he noted.

Since opening its doors in July 2011, the CFPB has fielded hundreds of thousands of complaints, many dealing with debt collection and mortgage issues. Addressing these issues is a core part of the agency's work, and it also helps inform its supervision and enforcement priorities, he said. Indeed, the CFPB has focused heavily on debt collection and consumer reporting issues, but it is also keeping a close eye on student loan debt, which makes up the second-largest consumer lending market, said Antonakes. As the cost of higher education steadily increases, graduates are beginning their careers with more debt. Today, more than 40 million Americans altogether hold approximately $1.2 trillion in outstanding loan balances, which has a domino effect on society and the broader economy, he said.

Cybersecurity: Panel shares regional perspective on broad challenge
A panel presented by the Graduate School of Banking at Louisiana State University addressed the pressing issue of cybersecurity. It's a challenge that, from the panelists' perspective, is unlikely to dissipate in the near future. Chief executives from three regional banks—Kelly King (BB&T), Jerry Host (Trustmark), and Kessel Stelling Jr. (Synovus) shared what their organizations are doing to protect against the ever-morphing threat. "We look at it almost like a military operation," said Host. "The bad thing is that you can never go on the offensive—you're constantly on the defense," he added, pointing to common measures such as constantly updating firewalls and educating employees and customers.

These and other efforts to defend against cyber-attacks are critical, said King. Indeed, an inability to fight off such attacks would ultimately erode confidence in the banking system— in turn, putting at stake "the very heart" of the whole economy.

Next chapter in banking ‘already being written'
Rising compliance costs, low interest rates, and too-big-to-fail were common themes as panelists explored banking's next chapter. "It's a complex world, and it's moving very fast," said Chip MacDonald, a partner at Jones Day, during a panel discussion on the banking outlook. Indeed, community banks are operating in a tough environment characterized by persistent headwinds, including higher regulatory costs and slow economic growth, said co-panelist Walter Moeling, a partner at Bryan Cave LLP. In an interview with the Atlanta Fed, Moeling described the outlook for community banks as "a state of transition from defense to offense." Now that banks are recovering from the crisis, they are thinking strategically about the future and asking "what do we do now?" he said. In an era of low-to-moderate growth, cost-cutting is one strategy, he said. "If you're not growing substantially…you should really be in a good position to go in and take a hard look at your overall operating costs," he said.

As a former banker, Atlanta Fed President Dennis Lockhart sympathized with the tough environment in which banks operate, noting that higher costs related to compliance, information technology, and other major investments make it difficult for smaller banks to compete. As a result, "banking is increasingly a scale economies business," said Lockhart. Some banks will be able to boost profits by aggressively attacking costs, but with roughly 6,700 banks nationwide, some consolidation is inevitable, he said.

Looking ahead, the next chapter of banking is "already being written," said Kansas City Fed President Esther George. Just as regulations in the 1980s dramatically changed the banking landscape over several decades, "the choices we make today will have many effects going forward." At issue is whether the regulatory reforms put in place following the financial crisis will be successful at ending too big to fail while leaving the country with an appropriately diverse banking system, she added. Bank regulatory agencies still have a tough task ahead of them when it comes to ending too big to fail, but they've made progress. "It's a condition that we're trying to treat and manage as opposed to an illness that's been cured," Lockhart said.

Recruiting for the future
As banks recruit new talent, many of them will be millennials—a name given to the generation born roughly between 1982 and the early 2000s. By understanding generational differences, employers can get the best out of their millennial workers—digital natives who crave interaction, extrinsic validation, and frequent feedback, said Andrea Hershatter, senior associate dean at Emory University. "They want to do their best work for you," she noted.

Hershatter offered a few suggestions for employers looking to incorporate millennials into their organization:

  • Rules and roadmaps: Millennials perform well in organizations with clearly defined rules and responsibilities. They are hungry for direction—frequent feedback, roadmaps, and other tools help them stay on track.
  • Inspiration and impact: Millennials tend to learn by doing. They care about brand authenticity and institutional values and want to work for organizations that are driving change.
  • Mentoring relationships: Younger workers work well in groups and are influenced by their peers. They've enjoyed close relationships with parents, teachers, and other authority figures and seek similar relationships with their managers.

This article was written by Lela Somoza, a staff writer in the Atlanta Fed's public affairs department.