Banking Conditions, Regulatory Updates Discussed in New "ViewPoint"

March 28, 2019

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

Thanks to all who joined us for our annual Banking Outlook Conference. "Big Data, Big Money: Exploring Banking’s Next Horizon" was a very informative event, featuring discussions on the economy and housing, cybersecurity risk management, the role of big data in decision making, and anti–money laundering compliance. The conference also included an overview of the transition to the Current Expected Credit Loss method and an update on supervision. A review of the day’s topics follows. But first, as always, we begin with our regular feature, State of the District.

State of the District
In the fourth quarter, overall conditions in the District remained stable. The median return on average assets was 1.13 percent, a 43 basis point improvement from the fourth quarter of 2017. The net interest margin rose for a majority of banks as interest rates increased, resulting in a 20 basis point improvement in median loan yields, year over year. However, competitive pressures pushed firms to boost rates on a variety of products, which may affect the margin going forward.

Asset growth for community banking organizations in the Sixth District in 2018 was the slowest it has been since 2015. Loan growth was stable, above 6 percent, but securities growth continued to decline, as market volatility and rising rates affected valuations. Asset quality appears strong, especially given the length of the current economic cycle. The median coverage ratio for community banks in the District reached 1.7 percent, the highest level since the financial crisis.

Median on-hand liquidity for community banks was slightly higher, at 17 percent, than the ratio for banks outside the District, which was 16.3 percent. Capital levels remain high due to sustained earnings growth and relatively low dividend payouts. The median tier 1 common capital ratio for Sixth District community banks was 15.4 percent, the highest level in four years. Over 98 percent of District community banks are considered well capitalized based on their capital ratios.

2019 Banking Outlook Conference
While data from year-end Call Reports provided a positive picture of industry conditions, discussions at the Outlook Conference offered additional context. A survey of attendees revealed that 75 percent of the audience believed that the credit cycle had already peaked. Speakers pointed to the fact that consumer credit was showing signs of deterioration in mortgage, automobile, and credit card performance. In housing, panel participants noted that affordability was dropping in many areas, as rising costs are making it less feasible to produce starter homes.

Speakers also provided a broad view of the cybersecurity challenges that institutions face. From building infrastructure to prevent attacks, training employees to avoid phishing attempts, and developing resiliency to recover from cyber events, firms have an enormous task. On top of keeping up with current events, banks must also consider what’s next—for example, the pros and cons of movement to cloud services. The rapidly developing use of big data has created opportunities to enhance processes and outcomes across industries. However, it also poses ethical questions, which must be carefully considered.

A speaker from the Board of Governors noted changes in leadership at the Board, as well as the agencies’ efforts to implement the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). Other issues the industry faces, including compliance with anti–money laundering requirements, as well as the transition to the Current Expected Credit Loss method were discussed as well.

Regulatory update
While the fourth quarter of 2018 featured several significant proposals, the first quarter of 2019 was relatively quiet. Changes to the Comprehensive Capital Analysis and Review program for the largest banks, including final rules regarding increased transparency and changes to the use of the qualitative objection, were announced. In keeping with EGRRCPA, the agencies issued a proposal to raise the threshold requiring state-member banks to conduct company-run stress tests from $10 billion in total consolidated assets to $250 billion. In place of the current annual cycle, the proposal would generally require firms above the threshold to conduct company-run stress tests once every other year. Previously, the agencies had announced that they would not enforce any requirements that conflicted with EGRRCPA. The proposal would formalize the framework the agencies have been operating under since the act passed last May.

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photo of Cynthia Goodwin
Cynthia Goodwin

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