Banking Conditions, Regulatory Updates Discussed in New "ViewPoint"

December 30, 2019

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

It's hard to believe we are almost twenty years into the 21st century. As I begin my tenth year in Atlanta, I am struck by how conditions have changed. When I arrived in 2010, the industry was mired in the financial crisis, bank failures were increasing, and legacy issues continued to plague us. In contrast, the Board's most recent Semi-Annual Supervision & Regulation Report, issued in November, noted continued overall robust conditions in community banks, as well as a steady decline in supervisory findings. Quite a difference from 2010!

However, as always, managing financial and operational risks remains a high priority. Firms face increasing competition from nonbanks, rapidly changing cyber security threats, and challenges associated with CECL implementation and the transition away from LIBOR.

As part of our efforts to assist institutions in dealing with the ever-evolving technology landscape, we will be hosting "Innovation Office Hours" at the Federal Reserve Bank of Atlanta on Wednesday, February 26, 2020. This event will provide an opportunity for banks and fintech firms alike to speak with Federal Reserve staff about innovation in banking and ask questions about the supervisory and regulatory implications. The program is intended to be a resource for supervised financial institutions and technology firms that provide services to banks. Technology is growing at a rapid pace, and our goal is to collaborate with both our banks and the industry to promote safer innovation. For more information or to register, click here. We hope that you can join us for this informative event! As always, this edition of "ViewPoint" includes our regular feature, State of the District.

State of the District
As noted above, overall financial performance by community banking organizations remains positive. The median return on average assets for banks in the Sixth District with assets under $10 billion was 1.2 percent in the third quarter of 2019, the highest level since the third quarter of 2006. Asset quality remains stable. With the notable exception of weakening covenants, underwriting is stronger than in 2006–07, despite increased competition from nonbanks. Median on-hand liquidity for community banks remained at 18.6 percent for the second consecutive quarter, slightly higher than the 17.4 percent ratio for banks outside the Sixth District. Capital levels at community banks remain healthy as well. The median tier 1 common capital ratio remains above 15 percent, although—on an aggregate basis—the dividend payout ratio increased year over year to 37.9 percent, up from 29.1 percent in 2018.

Regulatory update
In the fourth quarter, the agencies completed the majority of the regulatory changes required by the Economic Growth, Regulatory Relief, and Consumer Protection Act, finalizing rules for the community bank leverage ratio and the regulatory capital treatment for certain high volatility commercial real estate exposures, as well as adopting a new framework to further tailor the supervision of banking institutions with $100 billion or more in total assets. Other rules were adopted, including updates to management interlock rules for community banks with less than $10 billion in total assets. The agencies also issued statements to clarify supervisory expectations in two areas: the use of alternative data in consumer credit underwriting and the implications for Bank Secrecy Act compliance as a result of the change in the legal status of hemp.

Additional information on regulatory developments can be found in ViewPoint's Hot Topics on the Bank's public website. In the first quarter of 2020, the Bank's website will be updated to include more information on banking data and conditions, supervisory guidance and regulatory developments. We look forward to providing you with more timely information.

As always, we welcome your comments or questions. Please share your feedback at Remember to check back here for updates to the Supervision, Regulation, and Credit page on the Bank's website and the articles that will be published in the next quarter.

Continued success in 2020!

photo of Michael Johnson
Michael E. Johnson

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