ViewPoint: Introduction

Introduction | National Banking Trends | State of the District | Spotlight: Fair Lending | Spotlight: Residential Real Estate


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

Mike Johnson Welcome to this edition of "ViewPoint." As you know, banking conditions in the Southeast continue to be challenged, As a result, we expect bank failures in the region to be elevated throughout the remainder of this year and into the next. But while many challenges remain, there are signs of stabilization—and even some pockets of improvement—as you can see in our regular "State of the District" feature. Indeed, in some instances, the supervisory conversation with our banks has shifted from how to survive to recovery and how to return to profitability. While struggles remain for many Sixth Federal Reserve District banks, in aggregate, the banking industry is slowly emerging from the financial crisis.

Also in this edition of "ViewPoint," we revisit residential real estate conditions since these play such a pivotal role, both directly and indirectly, in the performance and financial condition of Sixth District banks. Beyond credit risk concerns, we also address fair lending compliance, which is another risk on our radar screen and one that deserves particular attention as banks struggle in their search for high-quality loan growth. Finally, I think all of you will appreciate a good speech given recently by Federal Reserve Governor Sarah Bloom Raskin titled "Community Bankers and Supervisors: Seeking Balance." I encourage everyone to read it as I believe it provides an excellent perspective on the complementary yet differing roles of bankers and regulators in helping to maintain the integrity and financial well-being of the banking industry. It also discusses some of the critical lessons learned in the recent banking crisis.

State of the District
First quarter 2011 results for Sixth District banks show signs of stabilization. While banks in the District continued to report aggregate loss for the quarter, the annualized loss was the lowest in nearly two and half years. In fact, the median return on average assets was positive for every state in the District, including Florida and Georgia. Still, roughly 27 percent of the banks reported a net loss for the quarter. The percentage of banks losing money is twice as high as out-of-District banks. Another positive development is credit quality, as loan charge-offs declined slightly and the growth of noncurrent loans has slowed significantly. Though a number of banks continue to struggle, evidence is growing that more and more banks are starting to turn the corner. You can see more details concerning first quarter results in this edition.

Residential housing market
The housing market remains a major drag on the economy. This condition is a particular source of concern for the Sixth District, where we have several of the most distressed housing markets in the nation. Despite several years of decline, the housing market is still very volatile. A robust recovery in this sector remains elusive. Home prices continue to experience downward pressure as distressed sales accounted for 40 percent of all sales through March 2011. Although sales have gradually recovered from a sharp dip after the federal tax credit expired in 2010, sales activity during the first quarter of 2011 remains below last year as markets struggle to gain momentum.

Tighter lending standards, high unemployment, and a continuing glut of distressed properties are leading to fewer sales. Despite these trends, there is some room for optimism. Low home prices have begun to attract buyers and investors back to the market, leading to a steady increase in home sales in some of the most distressed markets. For example, a record 35 percent of real estate transactions through March 2011 were all-cash sales, suggesting investors, at least, believe the bottom is near. In addition, very low inventory levels in some markets have led to a stabilization of nondistressed home prices and an increase in housing starts. Overall, we can expect continued volatility in home prices and sales over the next year, but we believe there's also some room for optimism as the level of foreclosures slowly declines and the overall economy gains more traction. You can learn more of the national and regional story in our spotlight on the residential real estate market.

Fair lending compliance: Marketing and redlining analyses
In this environment, banks are correctly focused on the safety and soundness of their loan portfolios. However, bankers must not forget to devote resources to ensure continued compliance with other important areas, such as fair lending requirements. Implications come from a bank's noncompliance with fair lending laws and regulations, and these implications could have a negative impact on a bank's legal and reputational risk. These risks are particularly heightened when lending standards have tightened and lending opportunities are somewhat constrained.

This edition of "ViewPoint" contains an essay that focuses on the need to conduct self-analyses from a marketing perspective so banks do not violate any fair lending laws or regulations. Moreover, the essay further describes how "redlining" could be a negative result of inappropriate marketing practices that are noncompliant with federal fair lending laws and regulations. We hope this essay helps raise awareness so all institutions can avoid the negative consequences associated with not complying with these laws and regulations.

Remarks by Fed Governor Raskin
Federal Reserve Governor Sarah Bloom Raskin delivered a speech in early April at a community banker conference in New York. In her speech, Governor Raskin talked about some of the things bankers must do more consistently in the future, including:

  • Ensure reasonable diversity in loan portfolios and funding structures.
  • Employ better management information systems and more forward-looking analyses of how portfolios might perform under periods of stress.
  • Adopt risk management structures that need not be overly sophisticated but still provide for a system of internal, independent checks and balances to ensure that risks are regularly identified and controlled.

For regulators, Governor Raskin mentioned that we should set the bar high when it comes to expectations regarding acceptable risk management and business practices. Regulators, she also said, must be careful not to be too hands-off when times are good and financial indicators are strong—which is when the seeds of financial crisis are planted—or, conversely, to overreact when times are bad. In this speech, she also shared an interesting analogy associated with the risks of "false positives" and "false negatives" in connection with our supervision practices. Again, I think reading the governor's speech is well worth your time, and I would be interested in hearing your thoughts or perspectives after you read it, especially if you have any differing views or opinions of the points she makes.

Dodd-Frank developments
Lastly, while we have not posted any articles related to Dodd-Frank requirements in this edition, it is very much on our radar screen and you can expect to see a plethora of new proposed rules in the near future. Examples of upcoming notices of proposed rulemakings include requirements for heightened supervision standards for systemically important financial institutions, which include existing banking organizations with more than $50 billion in assets, and supervisory standards for savings and loan holding companies. It will be a busy few years for rulemaking and implementation, with plenty of opportunity for further dialogue.

With that, I hope everyone is ready to enjoy the "green shoots" of summer. Please let me know if you have any feedback. As always, do not hesitate to contact me at

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