By Michael Johnson, Executive Vice President
Supervision & Regulation
Federal Reserve Bank of Atlanta
It's hard to believe that we're halfway through 2016! As we approach the six-year anniversary of Dodd-Frank on July 21, our first Spotlight article, coming soon, takes a look at the long-awaited revised proposal for incentive compensation rules. Our second Spotlight article includes a review of current conditions in commercial and industrial (C&I) lending. First, though, we assess recent banking trends in the State of the District.
State of the District
Our look at the State of the District continues to reveal some positive “firsts” since the crisis. As of March 31, only 5 percent of the community banks in the Sixth District had negative earnings, the lowest level in almost nine years. The aggregate value of OREO has fallen to its lowest level since mid-2008. Overall earnings, asset quality, liquidity and capital are stable. However, concerns related to energy lending and its spillover effects, as well as unease about overall economic trends, are affecting the outlook for the industry. Loan growth fell to 8 percent, the lowest level since the fourth quarter of 2014, as a result of tighter underwriting and reduced demand from borrowers. For the first time in more than a year, more banks had a declining net interest margin than had higher margins for the quarter. After years of cost-cutting, noninterest expenses are rising. These trends require careful monitoring.
Revised proposal for Dodd-Frank incentive compensation rules
On May 16, the agencies issued a revised proposal implementing the incentive compensation requirements of Section 956 of Dodd-Frank. The new proposal includes more stringent requirements that increase with asset size. All covered institutions (those with $1 billion or more in total consolidated assets) are prohibited from having incentive-based compensation programs that encourage inappropriate risk-taking that could lead to material financial loss to the institution. The most stringent requirements apply to the largest firms and their senior executive officers and significant risk-takers. The comment period ends on July 22, 2016. Our forthcoming article includes more information on the proposal.
C&I lending trends
In the years following the financial crisis, banks shifted their focus from real estate to C&I lending, and portfolios expanded rapidly. Now, however, delinquency rates are increasing and, according to the Federal Reserve Board's Senior Loan Officer Survey (SLOOS), C&I lending standards have tightened for three consecutive quarters. Our second article explores these trends in C&I lending and the implications for banks and the economy.
Supervision and regulation update
Recently, the Federal Financial Institutions Examination Council (FFIEC) issued a request for public comment on proposed revisions to the Uniform Interagency Consumer Compliance Rating system. The agencies are proposing changes to account for the legislative, regulatory, supervisory, technological, and market changes since the current system was adopted in 1980. The proposal aligns the rating system with the FFIEC agencies' current risk-based examination approaches and tailored supervisory expectations. As such, the adoption of the new system is not expected to increase the regulatory burden. Comments are being accepted through July 5, 2016.
As always, I welcome your comments or questions. Please share your feedback with me at ViewPoint@atl.frb.org. (Don't forget to check back here for the two Spotlight articles that will be published in the coming weeks!)
Michael E. Johnson
Executive Vice President, Supervision & Regulation
The Federal Reserve Bank of Atlanta