Economy Matters

December 20, 2017

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

Here we are at the end of another busy year! The old adage "the days are long but the years are short" was certainly true for 2017. Next year will continue to be marked with change as Governor Powell will likely start his term as chair and Governor Quarles settles in as vice chair for supervision at the Board of Governors.

Thanks to all of you who joined us for ViewPoint Live with our new Reserve Bank president Raphael Bostic. We had an interesting discussion about conditions in the District and the issues facing community banks. In case you missed it, you can view the program on our website.

In addition to our regular feature, State of the District, we are preparing articles on cyber security, vendor risk management and auto lending. First as always, we review the State of the District.

State of the District
Ten years after the financial crisis, Sixth District banks continue the long march to full recovery. More than half of the banks in the District now have a Return on Average Assets (ROAAs) above 1 percent for the first time in a decade. The improvement in earnings was primarily due to an increase in the Net Interest Margin (NIM), given recent changes in interest rates. Annualized balance sheet growth was just under 3.5 percent, on a median basis, in the third quarter. However, loan growth slowed among Sixth District community banks in the third quarter, with some banks’ loan growth turning sharply negative. On a median basis, loan growth was 6.2 percent but mostly concentrated in the largest community banks.

Asset quality remains strong. Net charge-offs, as a percentage of average loans, were 0.07 percent in the third quarter of 2017, a slight increase over the prior quarter. Improved profitability, repositioned securities portfolios, and slower loan growth kept capital levels stable. The median tier 1 common capital ratio remains above 15 percent. Although overall results are positive, liquidity remains a focus. Net noncore funding dependence increased over the last two quarters and was at its highest level in two years at 2.26 percent. The Federal Deposit Insurance Corporation has expressed concern over a growing reliance on noncore funding to fuel loan growth.

Regulatory Update
Several proposals to clarify supervisory expectations, increase transparency and tailor regulatory requirements are out for comment. On December 7, 2017, the Board of Governors issued a package of three proposals to increase transparency in stress testing. The proposals include:

• enhanced model disclosure
• changes to the Scenario Design Framework
• a new Stress Testing Policy Statement

The package is designed to further enhance the public's understanding of supervisory stress test models without undermining the effectiveness of the stress test as a supervisory tool. Additional information on the proposals can be found in our 2017 Supervision and Regulation recap, which will be published in ViewPoint in early January. Comments will be accepted through January 22, 2018.

Save the Date: 2018 Banking Outlook Conference!
Please join us for the 2018 Banking Outlook Conference, titled "Through the Looking Glass," on Thursday, February 22, 2018, as top industry experts share their views of the road ahead for the banking industry.

The conference will explore

• economic conditions and the monetary policy environment
• implementation of Current Expected Credit Losses standards
• consumer compliance from the Federal Reserve perspective
• a view from Raphael Bostic, president of the Federal Reserve Bank of Atlanta

Remember to check back here for the registration link for this special event and to read the articles that will be published next quarter.

As always, I welcome your comments or questions. Please share your feedback with me at ViewPoint@atl.frb.org.

All the best in 2018!