ViewPoint: Introduction

Introduction | National Banking Trends | State of the District | Spotlight: Commercial Real Estate | Spotlight: Interest Rate Yields


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

Mike Johnson It certainly has been an interesting past several months. First, we experienced the suspense of U.S. debt ceiling negotiations. On the heels of that event, Standard & Poor's downgraded, by one notch, U.S. government debt. Then we received news that economic growth was dramatically slower in the first half of the year than anticipated, causing most forecasts to be revised downward as well. So with all of this uncertainty and the continuing European debt crisis and fiscal woes, it's not surprising that market volatility has returned. Although we are seeing stabilization and even some signs of improvement in bank performance, as I reported in the last edition of "ViewPoint," I envision the overall environment will continue to be stressed for some time.

In this edition of "ViewPoint," we have our usual feature on Sixth District banking conditions, providing some room for optimism. We also address interest rate risk, which deserves particular attention as banks work to find yield in a low interest rate environment. In a similar vein, we revisit commercial real estate (CRE) conditions because of the pivotal role this sector plays, both directly and indirectly, in the performance and financial condition of Sixth District banks.

State of the District
Midway through 2011 amid the mounting concerns over the state of the economy, banking conditions in the Sixth District appear to be improving after hitting bottom. During the second quarter of 2011 and for the first time since 2008, Sixth District banks reported a positive, though small, annualized net income at the aggregate level. Many institutions returned to profitability as a result of lower provisions for loan losses, which were based on continued improvement in noncurrent loans and related charge-offs. In addition to the aggregate positive return of net income at the District level, each state in the District reported positive net income as well.

Today, more and more banks are focusing on revenue growth, not just problem asset resolution. Unfortunately, loan growth within the Sixth District continues to be challenging as new lending opportunities remain scarce and highly competitive. Net interest margins in the Sixth District, though up slightly year over year driven by low-cost deposits, remain lower than the rest of the country. In an effort to improve earnings through loan growth, competition for high-quality borrowers is intense, and we are seeing some pricing concessions. As long as broader economic concerns prevent businesses from expanding, finding new revenue opportunities will be difficult for many banks. Overall, we see some signs of improvement, but major challenges remain. You'll find more details concerning second-quarter results in this edition.

The quest for yield in a low-rate, high-volatility environment
In the current low interest rate environment with strained banking profits, it can be tempting to get added return by, in essence, assuming greater risks and extending duration farther out on the yield curve. It is particularly important to be aware of actions that may help earnings in the short term but expose institutions to excessive downside risk over a longer time horizon. While the current low interest rate environment should remain in place for some time, investment and pricing decisions made today will have an even longer-term impact. You can read more on current market conditions and potential interest rate risk implications for banks here.

Commercial real estate markets
CRE conditions are of particular importance to the Sixth District, as CRE is a significant source of lending, creating both jobs and government revenue. High levels of unemployment, tighter lending standards, and low consumer spending are a few of the reasons why CRE has struggled. However, some tentative positive signs are beginning to appear. For instance, increased demand for multifamily housing has led to significant growth in rental income and higher occupancies. These developments have heightened investor demand and prompted greater investment, higher transaction volume, and even some new construction. Demand for office space has increased over recent quarters, though so-called trophy office space has seen most of the improvement.

Slow consumer spending has hindered the recovery of the retail sector while also acting as a headwind for improvement in the office and warehouse sectors. Overall, continued recovery in CRE depends on job growth and general improvements in the economy. For more information on conditions in national and regional markets, see our spotlight on the CRE market.

Dodd-Frank turns one year old
In case you didn't notice, July 21 was the first anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, marking the effective start date of the Consumer Financial Protection Bureau and the date when supervisory and rule-making authority for savings and loan holding companies transferred from the Office of Thrift Supervision to the Federal Reserve. This anniversary has spurred a flurry of new proposed rules related to the implementation of Dodd-Frank, which can be found on the Federal Reserve's public website.

With that, I hope everyone is ready to enjoy the cooler—and hopefully less stressful—autumn days. As always, please let me know if you have any feedback and do not hesitate to contact me at

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