ViewPoint: Introduction

Introduction | Spotlight: Home Equity | Spotlight: Multifamily Housing | State of the District | National Banking Trends


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

Mike JohnsonAs we approach midyear, I am glad to report that we continue to see signs of Sixth District banks making progress in overall financial performance. Despite this good news, however, the situation in the eurozone looms large as a risk to the broader economy. Still, there is no denying the increasing positive momentum we are seeing in bank performance in the Southeast. All told, I am cautiously optimistic about the remainder of 2012.

State of the District
Some of the positive trends in earnings and asset quality that were first seen in the second half of 2011 became more pronounced in the first quarter of 2012. Despite the concerns expressed by community banks about the impact of new financial regulation, banks are experiencing stronger aggregate net income growth compared with the same quarter last year. Of course, cost control remains as important as ever to a bank's health. At the same time, asset-quality problems that have plagued banks in the Sixth District since the beginning of the financial crisis lessened in the first quarter of 2012 as charge-offs dropped to a four-year low. Growth continues to be a challenge, with particular weakness seen at community banks with asset sizes under $1 billion. That said, commercial and industrial lending is starting to improve, which bodes well for the small business sector.

Commercial real estate (CRE)
As you know, one of the key areas that we closely track is the CRE market. Recently, even this market has shown some modest signs of improvement. While news for the office, industrial, retail and hospitality sectors remains subdued overall, some specific submarkets and property classes are showing improvement. Within the CRE marketplace, most of the growth and positive news has been within the multifamily sector.

Commercial real estate is an integral part of the economic engine of the Sixth District, and in this edition of "ViewPoint," we explore some of the issues and trends behind the resurgence in the multifamily market and some of the continuing headwinds facing CRE. Please see more of the national and regional story in our spotlight article. For those bankers in our readership, you may also want to visit the latest program in our "Ask the Fed" series recorded on April 16 in Lexington, Kentucky. CRE and the residential markets were featured on the agenda.

Home equity loans (HELOCs)
On the residential side of real estate, HELOC portfolios are coming under increased scrutiny by bank supervisors. Some observers believe that banks have in general not taken losses on these loans commensurate with the decline in house prices. In addition, recent studies have shown that since the crisis erupted in 2007–08, stressed borrowers have increasingly been defaulting "strategically" on their obligations, which has altered traditional thinking about the relative risk of holding first versus second liens. It's difficult to generalize about the character of these portfolios, however. A number of home equity loans were made as first liens, and some HELOCs are essentially business loans. The ability of the second lien lender to manage the loan is usually affected by whether the holder of the second lien also holds the first one. Either way, we note that default rates increase dramatically once principal amortization kicks in, which will likely happen in more cases as the interest-only periods begin to expire. For all these reasons, we are spending more time reviewing these portfolios consistent with recent guidance issued by the Federal Reserve. We explore the subject more fully in this edition of "ViewPoint."

Finally, I just wanted to draw your attention to several recent regulatory pronouncements.

First, on May 14 the Federal Reserve Board issued an interagency statement. The statement clarifies supervisory expectations for stress testing by community banks. The statement, I believe, is consistent with what I have said in some previous messages: while the supervisory stress-testing expectations for larger organizations will not trickle down to community banks, we still expect banking institutions regardless of size to abide by sound risk management practices and be able to analyze the potential impact of adverse outcomes on their financial condition. This guidance also highlights recent efforts by the Federal Reserve to reduce the burden on community banks by clarifying what guidance applies to them.

Second, on June 7, the Federal Reserve Board approved three notices of proposed rulemaking (NPRs) that would revise and restructure the Board's regulatory capital requirements. The three NPRs propose the Basel III capital standards, a standardized approach for risk-weighted assets, and changes to the advanced approaches rule. The proposals aim to reorganize the Board's capital rules and the market-risk capital rule into a comprehensive, integrated regulatory capital framework. The proposed framework would apply consolidated capital requirements to savings and loan holding companies. Please refer to the publicly available FAQs on the subject NPRs. Also publicly available in their respective NPRs are the appendices that summarize the parts of the Basel III and standardized approach NPRs that would apply to community banking organizations.

Understandably, the biggest impact of these rules is on large banks, but changes to the definition of capital, such as limits on deferred tax assets, will have an impact on all banks.

With that, I will sign off for now and extend my best wishes to all of you for continued financial performance improvement and, most importantly, a safe summer. Please share any feedback you may have with me at

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