Banking Conditions, Regulatory Updates Discussed in New "ViewPoint"

January 3, 2019

By Cynthia Goodwin, Vice President
Supervision, Regulation & Credit
Federal Reserve Bank of Atlanta

The fourth quarter has been eventful—once again, natural disasters have hit the Sixth District. Hurricane Michael's effects were felt in several areas across the southeast and caused historic devastation along the Florida panhandle. The Fed, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and state banking agencies have issued a statement on supervisory practices regarding financial institutions and borrowers affected by Hurricane Michael that encourages banks to meet the needs of their customers as they recover. Our thoughts are with those who have experienced a loss and those who are helping with the recovery.

On the regulatory front, several proposals have been issued to implement provisions of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), including a framework for supervision of large financial institutions, reduced reporting requirements, a community bank leverage ratio, and an increase in the threshold for residential appraisal requirements. Approval of the proposed rules will complete the majority of the bank supervision reforms required by EGRRCPA. In other actions, the Board approved a final rule implementing a new examination rating system for large financial institutions. The agencies also issued a statement encouraging institutions to pursue innovative approaches to Bank Secrecy Act/anti–money laundering (BSA/AML) compliance. Additional detail is available below.

As always, this edition of "ViewPoint" includes our regular feature, State of the District. We are also preparing updates on the commercial and residential real estate environments. First, we review the State of the District.

State of the District
The increasing interest rate environment has improved earnings for many community banks. In the third quarter, the median return on average assets (ROAA) for community banks in the Sixth District was 1.17 percent, a slight decline from the second quarter postcrisis high of 1.20 percent. Given the upward shift in rates this year, a majority of banks experienced an increase in both net interest income and net interest margins in the third quarter. Loan yields have improved slowly over the last eight quarters, reaching 5.80 percent in the third quarter. However, higher rates have put pressure on funding costs as well—interest expense on deposits increased to the highest level in more than three years. Capital levels remain healthy, helped by a decline in dividend payouts during the quarter.

On a median basis, nonperforming assets remain at a cyclical low of 1.32 percent. Despite the positive asset quality metrics, examiners have noted that banks appear to be increasing their risk limits and risk appetites in certain portfolios, including residential mortgages and commercial and industrial loans. These developments warrant close monitoring. Liquidity remains stable, year over year, at community banks in the District. However, during the past year, asset growth has continued to outpace deposit growth. Banks are increasingly turning to brokers and deposit listing services to gather deposits rather than raising rates in their home market. Banks are also using more Federal Home Loan Bank advances and other borrowed money to fund loan growth. These trends are also being monitored.

Regulatory updates—Proposals
On October 31, the Board of Governors issued a proposed framework for tailored supervision of large financial institutions with $50 billion or more in total consolidated assets. Risk-based criteria would be used to assign institutions to one of four categories. Regulatory requirements for capital and liquidity would be tailored for each risk category. Comments will be accepted through January 22, 2019.

On November 7, the agencies released a proposal to streamline regulatory reporting requirements. The proposal would permit qualifying insured depository institutions with total assets of less than $5 billion to file the most streamlined version of the Call Report, the FFIEC 051. In addition, the agencies are also proposing to reduce, by approximately 37 percent, the number of existing data items reportable in the FFIEC 051 for the first and third calendar quarters. Comments will be accepted through January 18, 2019.

On November 21, the agencies requested comment on a proposed Community Bank Leverage Ratio (CBLR). Under the proposal, a banking organization could elect to use the CBLR framework to satisfy capital requirements if it has less than $10 billion in total consolidated assets, meets risk-based qualifying criteria, and maintains a leverage ratio greater than 9 percent. Comments will be accepted for 60 days following publication in the Federal Register.

On December 4, the three federal banking agencies requested comment on a proposal to raise the threshold for residential real estate transactions requiring an appraisal from $250,000 to $400,000. In lieu of an appraisal, an evaluation consistent with safe and sound banking practices would be required. The proposal also incorporates the appraisal exemption for rural residential properties included in EGRRCPA and requires evaluations for those transactions as well. Comments will be accepted through February 5, 2019.

Regulatory updates—Final actions

On November 2, the Board announced that it is adopting a new rating system for large financial institutions. The system applies to bank holding companies and noninsurance, noncommercial savings and loan holding companies with total consolidated assets of $100 billion or more, and U.S. intermediate holding companies of foreign banking organizations with total consolidated assets of $50 billion or more. Component ratings for capital planning and positions, liquidity risk management and positions, and governance and controls will be determined using a new rating scale. The system will be implemented in 2019 for Large Institution Supervision Coordinating Committee (LISCC) firms and in 2020 for all other large financial institutions. The final rule is effective on February 1, 2019.

On December 3, the Federal Reserve Board, along with four other regulatory agencies, issued a joint statement encouraging depository institutions to explore innovative approaches to both meet BSA/AML compliance obligations and further strengthen the financial system against illicit financial activity. To assist depository institutions in this effort, the agencies have established or will establish projects or offices to engage with the private sector.

Save the Date—2019 Banking Outlook Conference
Please join us on Thursday, February 28, 2019, to discuss "Big Data, Big Money: Exploring Banking's Next Horizon" at the 2019 Banking Outlook Conference. Topics include an update on the economy and housing landscape, cybersecurity, the role of data in decision making, bank secrecy and anti–money laundering, the current expected credit loss transition, and a view from the Board of Governors.

As always, we welcome your comments or questions. Please share your feedback at Remember to check back here for the articles that will be published next quarter.

All the best in 2019!

photo of Cynthia Goodwin
Cynthia Goodwin

Vice President, Supervision, Regulation & Credit
The Federal Reserve Bank of Atlanta