ViewPoint: Introduction

Introduction | State of the District | National Banking Trends


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

Jackie Morgan Now that 2010 is almost over, I can say that at the very least it has been quite a year for the banking industry. As noted in our State of the District section, the industry is not yet out of the woods, but I see some improvement on the 2011 horizon and am growing a bit more optimistic about the outlook. Beyond our regular Sixth Federal Reserve District banking conditions feature, this edition of "ViewPoint" also touches on the Federal Reserve's involvement in working through a number of challenges, namely mortgage foreclosures and small business lending, that are slowing the economy's return to healthy growth. This issue also provides some perspective on Basel III and other recent capital developments.

Banking conditions
As most of you know, banking conditions remain extremely challenged in the Southeast (see the State of the District section for more detailed information on third-quarter financial performance). In fact, 36 percent of all banks in the district with assets less than $10 billion are still reporting losses totaling almost $1 billion on an annualized quarterly basis. These losses represent an improvement on both a quarterly and a year-over-year basis. While I expect we will continue to see an elevated level of problem banks and bank failures in 2011, I believe we also will see continued stabilization and even improvement as the sheer volume of problem assets works its way through the pipeline.

Mortgage foreclosures
My guardedly optimistic view for 2011 is, of course, predicated on no new material shocks to the financial system. Unfortunately, we do not need to look far to see where some potential shocks could come from. For instance, the mortgage foreclosure issues that have been so prominent in the news recently have potential ramifications for specific banks and could harm the reputation of the banking industry as a whole. While it is too soon to know how the foreclosure issue will play out, you might find this presentation helpful in sorting through what is happening and how the regulatory community is responding. You might also find a recent speech on this topic by Federal Reserve Governor Sarah Bloom Raskin of interest.

Small business lending
As discussed in our report on banking conditions, aggregate lending in the district has declined for eight consecutive quarters. Recognizing this trend, the Federal Reserve has been working to better understand the issues and challenges related to small business financing in particular. The story is not straightforward.

While it is true that bank underwriting standards have understandably been strengthened since the onset of the crisis, we also hear accounts of solid companies that are unable to obtain credit. Of course, underpinning this situation is the fact that demand for loans is down as many creditworthy companies are not growing because of the sluggish economy. To sort through the conundrum, on Oct. 26, 2010, there was a very helpful "Ask the Fed" conference call sponsored by the Federal Reserve Bank of St. Louis, which focused on this topic and what is being done on a number of fronts to address it. In my last "ViewPoint" introduction, I provided a link invitation to this session, but just in case you missed it, the entire program has been archived, and you can access it. I believe the program is very informative, and I encourage you to take a look.

Also, in case you are interested in more information on this topic, the Federal Reserve Bank of Atlanta's Small Business Focus summarizes data on small business activity from a variety of sources, including business surveys, employment patterns, and bank lending statistics.

Basel III
Because an excess of leverage in the banking industry was a key contributor to the global financial crisis, improving capital standards for the banking industry is a point of emphasis both domestically and internationally. To address this issue, the Basel Committee on Banking Supervision decided to make some fundamental reforms (collectively referred to as Basel III) to the existing regulatory framework.

These reforms were announced on September 12 and accepted by the G-20 at their recent summit in Seoul. While there has been quite a bit of discussion of these rules, and I won't reiterate them here, I think it is worth mentioning the strong emphasis that the Basel III accord places on building a healthy foundation of core common capital.

Closely related to this topic is the Federal Reserve's longstanding policy on capital distribution by bank holding companies. This policy emphasizes the importance of sufficient earnings to support capital distributions with a strong capital planning framework as a foundation. We recently issued an addendum to this policy, SR 09-4, that provides guidelines by which the Federal Reserve will evaluate capital distribution proposals from the largest banking organizations. I quote from the press release: "The criteria provide a common, conservative approach to ensure that BHCs [bank holding companies] hold adequate capital to maintain ready access to funding, continue operations, and continue to serve as credit intermediaries, even under adverse conditions."

Even though this approach applies only to the largest banking organizations, I believe it provides important insights into the type of fundamental capital planning expectations that, albeit scalable, should be considered for all banks.

Finally, Basel III also addressed the need for improved tools to assess liquidity by introducing a new liquidity coverage ratio, which requires banks to hold a buffer amount of highly liquid assets at least equal to net cash outflows over a 30-day period and a new net stable funding ratio. The most important point to emphasize related to these new tools is that they are subject to an "observation period" prior to implementation in recognition of the fact that more work is likely needed in this area.

I hope you find this edition of "ViewPoint" to be informative and useful. I look forward to reconnecting with you again in early 2011. As always, please do not hesitate to contact me at

Have a wonderful holiday season and a happy new year!

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