Introduction | Spotlight: Banking and Emerging Cybersecurity Risks | Spotlight: A Dodd-Frank Milestone: Enhanced Prudential Standards Adopted | Spotlight: The Dwindling Size of Small Business Lending and the Impact of Bank Failures | State of the District| National Banking Trends


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

Mike JohnsonIt's difficult to believe that 2014 is more than half over, isn't it? Although I know it has been a challenging period for banking, the good news is that 2014 so far has continued to see gradual improved banking performance in the Southeast. In this issue of "ViewPoint," we will explore three different topics: a risk (cybersecurity), a challenge (small business lending), and a new rule (enhanced prudential standards). First, however, we take a look at recent banking trends in our recurring State of the District section.

State of the District
Earnings performance continued to improve in early 2014, as the percentage of unprofitable banks in the district declined by half, to 9 percent. However, the source of the improvement remains largely the same: a tight control on expenses rather than an expansion of income. Banks also continue to reduce provision expense, which has pushed the allowance for loan losses as a percentage of total loans back to precrisis levels. The outlook for earnings remains complicated by the fact that noninterest income at community banks has barely moved in recent years. Going forward, banks will continue to search for loan growth to supply additional interest income. The evaporation in mortgage refinance activity has made this endeavor even more challenging.

Recent distributed denial of service attacks (DDoS) on large financial institutions have served as an important reminder that banks must be diligent in creating a cybersecurity framework that enhances their ability to manage risks and adapt quickly to address emerging security threats. These threats include vendor risks (a topic covered in a previous edition of "ViewPoint"), malware, data leakage, and further DDoS attacks. To help confront these cybersecurity challenges–which we examine in this edition of "ViewPoint"–the Federal Financial Institutions Examination Council (FFIEC) has formed the cybersecurity and critical infrastructure working group (CCIWG) to enhance communication among the FFIEC member agencies and build on the existing efforts to strengthen the activities of other interagency and private sector groups.

Small business lending trends and bank failures
Since the financial crisis, small business lending at banks has dropped significantly for a variety of reasons. Demand has suffered as the number of owners seeking credit has fallen to historic lows as a result of pessimism over the economy, while the supply of credit has been adversely affected by tighter underwriting standards and a reduction in the number of banks that providing credit to small businesses. Concern about the decline in small business lending, which we look at in this edition, has been so great that policymakers have developed programs aimed at increasing such lending. Although the programs appear to be having some success, the reduction in the number of community banks still has had an overall negative impact on small business lending.

Enhanced prudential standards
On February 18, the Federal Reserve Board approved a rule requiring enhanced supervisory standards for capital, liquidity, and risk management for U.S. bank holding companies with $50 billion or more in total consolidated assets and for foreign banking organizations with $50 billion or more in nonbranch U.S. assets. This action marks a milestone in the implementation of Dodd-Frank's Section 165 framework for managing and reducing the systemic risk posed by large banking firms. The requirements in the final rule will aid in improving the resiliency of these firms and provide a level playing field for all banking firms operating in the United States. Domestic bank holding companies have until January 1, 2015, to comply with the enhanced standards, also explored in this edition. Foreign banking organizations have an extended period in which to comply, beginning on July 1, 2016.

Upcoming events
I also want to give you a heads-up on what we are planning for "ViewPoint" starting next quarter. In October, we will have our inaugural "ViewPoint Live" webcast, where I will briefly analyze current banking trends and take a look at a current topic. Afterward, webcast participants will have the opportunity to ask me questions in real time via email. Please note that the webcast will be by invitation only, contingent on subscribing to the Atlanta Fed's Financial Update. Once registration information becomes available, we will pass it along to you.

Later this year, we will also supply registration information for live streaming of our annual banking outlook conference scheduled for February 26, 2015.

As always, I welcome your comments or questions. Please share your feedback with me at

Michael E. Johnson