ViewPoint: Introduction

Introduction | State of the District | National Banking Trends | State & Local Government Finances Spotlight


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

Jackie Morgan Welcome to the first edition of "ViewPoint" for 2011. As we head into spring, it helps to revisit the state of the District's financial performance for 2010, which I believe offers insights into the possible 2011 outlook. Other topics of supervisory interest covered in this edition are:

  • A special feature on state and local government exposures for Sixth District banks, a potential concern on our radar screen
  • My thoughts regarding a recent article in the American Banker that focused on frictions between state and federal banking regulators
  • A presentation from the Federal Reserve System's "Ask the Fed" discussion series on Interagency Appraisal and Evaluation Guidelines

Add these topics to the known list of challenges such as foreclosure problems, Dodd-Frank rules—most of which still remain to be written—and broader economic risks such as the recent spike in energy prices, and you can see that 2011 looks like it will be another eventful year for the banking sector.

Snapshot of the District
Unfortunately, more than 43 percent of Sixth District banks lost money in 2010. This percentage remains a very high figure, with the states of Georgia and Florida continuing to report median negative returns. While aggregate losses were less in 2010 than they were in 2009, the high number of banks reporting losses does not bode well for the coming year. On the bright side, net loan charge-offs continue to decline along with the volume of noncurrent assets, although they both remain at extremely elevated levels. While many banks will unfortunately continue to struggle, I still remain cautiously optimistic that 2011 will be a turnaround year for the majority of the District banks.

State and local government finances
This report provides more detail on the much-discussed issue of government finances, with a focus on Sixth District bank exposures. Exposures at most banks appear to be generally contained, but I am concerned about more broad-based financial issues arising at state or local governments and the potential spillover effects on local economies and related impact on community banks. Currently, our supervisory response is to continue to monitor the direct exposures on bank balance sheets through our exams and other recurring dialogue to try to better understand the indirect risks. I think you will find it helpful to link to Chairman Bernanke's recent remarks, delivered in early March, that addresses state and local finances.

State and federal working relationships
I also want to address a recent article in the February 10 edition of American Banker. Titled "Fed-up State Commissioners Urge More Flexibility and Judgment," it suggested strains between federal bank supervisors and our state colleagues. The article quotes many of our state partners, who highlight legitimate issues and concerns related to decision-making and flexibility.

That said, I believe it is important to appreciate that we have strong working relationships and jointly agree on our supervisory approach the vast majority of the time. In the rare instances when we do not agree, I believe our relationships with the state supervisors in the Sixth District remain collegial, collaborative, and professional. In fact, these occasional differences of opinion, I believe, strengthen the overall regulatory process.

Of course, at the Federal Reserve, we discuss key issues with our Washington colleagues in order to gain their important national perspective. There is a trade-off between national consistency and local flexibility, and I will be the first to admit it is difficult to get this balance right all the time. But from a Federal Reserve perspective, I believe we always consider and value the input and important role of our colleagues in the states.

Interagency appraisal and evaluation guidelines
On December 2, 2010, the federal financial regulatory agencies issued final supervisory guidance on sound practices by financial institutions for real estate appraisals and evaluations. The guidelines, which supersede the 1994 guidelines, explain the agencies' minimum regulatory standards for appraisals. They also incorporate the agencies' recent supervisory issuances on appraisal practices, address advancements in information technology used in collateral valuation practices, and clarify standards for the industry's appropriate use of analytical methods and technological tools in developing evaluations. The guidelines also emphasize key people and processes as well as communication expectations when interacting with appraisers.

On February 23, 2011, a very informative "Ask the Fed" conference call—sponsored by the St. Louis Federal Reserve Bank—focused on this topic and offered good highlights of the interagency guidance. Some of you may have connected to this program, but just in case you did not, the entire discussion has been archived and you can access it by registering here. I would encourage you to do so. In the meantime, please also read the related presentation on interagency appraisal and evaluation guidelines.

With that, please let me know if you have any feedback. Best wishes for a prosperous 2011. As always, please do not hesitate to contact me at

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