Banking

The Atlanta Fed's 2009 Annual Report provides perspective on a challenging year in banking in the Southeast, as the industry sought stability and stronger risk management even as problems persisted.

In addition to exploring the industry's performance, the annual report examines the role and work of financial regulators, lessons learned, and supervisory changes undertaken by the Atlanta Fed and the broader Federal Reserve System.

Promising signs amid difficulties
Across the region's banking landscape, promising signs emerged late in the year. For example, some large banks began reporting fewer new problem loans. Nevertheless, rising failures, lower earnings, and ongoing deterioration of loan quality reflected fallout from the financial crisis, the recession, and an overreliance on real estate lending, the report notes.

Three performance measures summarize the difficulties that plagued the region's financial institutions.

• Failures: Seven banks in the Sixth Federal Reserve District failed during 2008 and 42 in 2009, after only two failures in the previous five years.
• Earnings: After amassing cumulative profits exceeding $50 billion from 2002 through 2007, financial institutions based in the six states and insured by the Federal Deposit Insurance Corporation (FDIC) lost a combined $16.8 billion during 2008 and 2009, according to data compiled by the FDIC from bank call reports.
• Loan quality: At the end of 2009, the region's financial institutions reported a combined $4.4 billion in loans 90 or more days past due, more than triple the amount at the end of 2006 and six times the level at the end of 2004.

Drawing information from loss reviews
To describe the work of banking regulators, the annual report draws on material loss reviews of failed financial institutions. Those reviews are post-failure reports, compiled by the inspectors general of the federal regulatory agencies, that detail the causes of an institution's failure and critique the performance of regulators.

From material loss reviews of southeastern banks, a consensus emerges: examiners were not sufficiently forceful in compelling troubled institutions to improve their business practices, most notably in the areas of real estate lending and risk management. However, the annual report notes that frontline examiners were equipped with tools that in retrospect were inadequate in a crisis.

As Atlanta Fed President Dennis Lockhart notes in the annual report's introductory letter, the financial crisis clarified the need for improvements in banking regulation, including greater horizontal supervision. This approach considers interconnections among firms and how these connections can affect the financial system and economy. Lockhart also comments briefly on regulatory reform.

"Let us hope that the regulatory regime for the future truly strengthens our defenses against the recurrence of financial crises," he writes.

July 8, 2010