ViewPoint Live: Discussing Trends in Regional Banking Transcript
Lali Shaffer: Hello, and welcome to the Federal Reserve Bank of Atlanta's ViewPoint Live. We are so glad that you could join us today. I'm Lali Shaffer, senior financial specialist in our Supervision and Regulation division, and I'm joined by Mike Johnson, our executive vice president, along with our special guest—Raphael Bostic, president of the Atlanta Fed.
Raphael is in charge of all of the Bank's activities, including monetary policy, supervision and regulation, and payment systems. He also serves on the Federal Reserve's chief monetary policy body, the FOMC, or Federal Open Market Committee. Before arriving at the Bank, he was the Judith and John Bedrosian Chair in Governance and the Public Enterprise at the Sol Price School of Public Policy at the University of Southern California. Raphael has also held positions at the U.S. Department of Housing and Urban Development and the Federal Reserve Board of Governors.
Before we get started, we will be taking your questions today, which you may submit online by using the button on your screen. And as a reminder, the views expressed here are of the presenters and may not reflect the views of the Federal Reserve Bank or System. We will begin with an update on current banking conditions in the United States, presented by Mike. Mike?
Michael Johnson: Thank you, Lali—and welcome back, Lali, as moderator. Raphael, welcome to your first ViewPoint Live. We're really glad to have you. Typically, we have a specific topic that we like to dive deep into related to supervision. But today, I think you're the topic.
Raphael Bostic: I think the dive is happening with me, right?
Johnson: That's right. And as always, we try to start with a snapshot of U.S. banking conditions, in large part—kind of a takeaway for the audience. And I'm going to be really brief this time because we want to spend as much time answering your questions, and spending time with your answers, Raphael.
So you have this set of charts where we talk about loan growth, asset quality, net interest margin, which is a primary contributor then to return on average assets. And as always, we split the slide up into three different categories: banks below a billion, banks between a billion and ten, and banks that have asset size greater than ten billion. So again, I'm going to be relatively quick. And I think probably the biggest thing to point out here is slowing loan growth in the third quarter, and that's in the panel to your upper left. That is something that we'll keep our eye on—hopefully it's transitory, related to maybe some of the weather events, and so on. But I think that's probably the key takeaway, because growth slowed across all three of those banking segments that I mentioned.
Asset quality continues to be stellar, and net interest margins continue their slow but steady rise, and ROAA remains constant. So I don't think there are any stories there, other than the slowing loan growth. So we'll talk more about that, I'm sure, next time in our online version of "ViewPoint," as well as perhaps later on in our banking conditions segment for spring next year.
But with that, Raphael, let's get to the real reason why we're here, which is: you. Would you like to start us off with any opening comments before we get to questions?
Bostic: Sure, Mike. And Mike and Lali, thank you for allowing me to crash your show here. It's good to be here. For me, this is something that is really a continuation of what I've tried to do as I've started here at the Bank, which is reach out and engage with business leaders, community folks, and try to get a sense of what's going on. This is a great opportunity to talk with the banking community about some of the things that I'm seeing and some of the things that people might be worrying about.
First and foremost, I'm expecting, is the regulatory environment. And as we all know, we're going through a transition at the board level: Governor Powell, who had been the vice chair for supervision (and acting roles), has been nominated to be the new chair, and we have a new chair of supervision, Randal Quarles. And a lot of what we're going to try to do is work with him to engage and "right-size" our regulatory structure.
Just some background—you guys all know this, but I thought it's useful to level set—coming through the crisis, we had a lot of institutions that had real difficulties and really struggled, and the regulatory infrastructure that emerged in response really tried to address those sorts of things and create some stabilization. And Mike, some of the things you presented about the improved bank performance are really, I think, to some extent a reflection of the effect on this of that.
But with every regulatory environment, there are always areas where you might have overshot a little bit, and been too difficult. And one dimension that I know we've had lots of conversations about is this "big bank versus small bank" dynamic, and the question about whether we've really hit the target appropriately—particularly for small banks. And I think we've seen our system really start to recalibrate and try to reduce some of the regulatory burden, and we've already done a couple things, like with the call report requirements—and there are some things proposed as well.
It will be interesting to see how that moves forward. I'm really looking forward to having conversations with Governor Quarles, and really working interagency to try to find something that makes sense.
Shaffer: Great, thank you, Raphael. So I bet you didn't know it was one of my personal goals to have you on the show, and I was fully ready to wait at least two years before we could get you on.
Bostic: Well, we beat that—we definitely beat that, so that's good. [laughter]
Shaffer: Yes, yes. I'm thrilled to have you today. I'll give you a quick second to rest while I start with a question for Mike. Mike, can you share any items that might be on the radar for bank supervisors in 2018?
Johnson: Sure, Lali—great question. We get that question pretty much everywhere we go when we speak to the industry, so we might as well talk about it here as well. I think in addition to Raphael's opening comments around a refresh and relook at a number of the regulations that are out there—I think that's a theme that we'll see through 2018.
But probably more specific, and underpinning your question, is what kind of risks that we're seeing and what may be changing, to the changes that you might see to the supervisory regime. I think 2018, to be honest with you, is probably a bit more of the same—very similar to 2017. Our highest risk is cybersecurity. When we talk to the industry, when we talk to bankers, trade groups—it's their highest risk, and for individual banks it's their highest risk as well.
But I think we collectively struggle with the question: how do we know what good risk management looks like in this space? And how can we do a better job as supervisors, being clear about what our expectations are as well as supervising against that risk? But a part of that, too, is the transparency with the industry. As we learn, we want to make sure that the industry is learning as well. So I think that's high on the on the radar screen.
The panel we showed before about loan growth—that's something that is, I think, going to continue to be highlighted on our radar screen as well. And from a credit risk perspective, continued focus on commercial real estate. We're not where we were precrisis by any stretch, but there are markets, and there are types of commercial real estate within certain markets—primarily, maybe multifamily—and some high-growth areas that are an area of focus.
The last thing that I wanted to mention here—while, again, net interest margins are improving, we're expecting—I think most people are expecting—a slow, gradual increase in interest rates. But interest rate risk, if something along the way goes awry, is an area that we'll continue to keep our eye on as well.
Shaffer: Great. Raphael, you spoke about efforts to reduce regulatory burden in your recent meetings with bankers. What additional concerns do they have?
Bostic: Well, Mike talked about the interest rate environment. Everyone worries about that, and we're trying to as much as possible remain diligent to make sure that, as we evolve our monetary policy, it happens in a way that everyone understands it—the expectations, no surprises—so that people can make the plans that they want.
The cyber issue is one that everyone is concerned about. And in particular, there are real questions about to what extent are we thinking about the third-party partners with banking institutions that might actually introduce their own cyber risks, that then the bank has to grapple with. How are we thinking about that? That's an issue that comes up a lot. And then the issues around concentrations, and the loan portfolio. And the risk, and how are we thinking about risk, is important.
And then the last one I've had a number of conversations on is the Community Reinvestment Act, and how is that going to be regulated moving forward—or how is it going to be revised, or reformed? The Treasury Department has announced an initiative, and I've had some conversations with some of their officials on that regard. So there are lots of moving parts, and it's an interesting time to think about banking and oversight of the sector.
Shaffer: Okay.
Johnson: So Lali, if I can interject a bit of a public service announcement, but also maybe a question for Raphael. You attended your first CDIAC meeting last week—and for those of you who are not aware, CDIAC stands for Community Depository Institutions Advisory Council. I think I got that right.
Bostic: I think you did. [laughter]
Johnson: What did you think? And why do we have a CDIAC, and what were your impressions?
Bostic: So it was really interesting. As I mentioned at the opening, I'm trying to meet with a lot of different organizations and trying to get a sense of how sectors of industries are seeing the world and understanding it. It was really useful to hear a perspective from smaller institutions that are really trying to serve important functions at the local market. We know that these community banks, they in some markets are responsible for more than 50 percent of all small business lending. And so if we want to make sure that we have and retain a vibrant local economy, we've got to make sure the small businesses are getting capital—which means we've got to make sure that we're not doing things that adversely affect the ability of the institutions that provide that capital to operate in an effective way.
So that was really interesting, just to get a sense of some of the stresses they're feeling. They talked a lot about the cyber issue, and the concern about their ability to even assess the various vendors to know, and wonder if there are ways that we might help facilitate that, which is useful. And then their relationship to each other, to the credit unions, to...there are many, many dynamics that emerged, and so while they're all one group—we treat them like one group from a size perspective—they're not all the same, and it was really useful for me to see the interplay, so actually I learned a lot.
But one thing that was really important for me was the reality that many of these institutions are a primary provider of credit in some smaller markets. So you think about some of the more rural places in our district. They may be primarily served by maybe one of these community institutions, and if they don't have that, those places are going to really struggle.
Johnson: I think that's right. We talk a lot about tailoring regulation between large and small banks, but there's also an urban-rural component to that that we should keep in mind as well.
Shaffer: Great, thank you. You mentioned earlier about the Community Reinvestment Act: beyond the brick and mortar branches, what do you see as the future of the CRA?
Bostic: Well, I think the future is going beyond the brick-and-mortar branches, right? So when the CRA was formed, branching was the way that banking was done, and today that's just not the case. So we need to see if there are ways to refine our thinking about what it means to say a bank has a service area. How do we think about that, geographically? Also, what it means in terms of how a bank distributes its retail services, and what sorts of things and ways that they make things available.
And then just metrics about who appropriate competitors are, about what kind of incentives should count. I had a conversation with a community banker where they changed their incentive structure so that if a salesperson originated a loan to a large property, it was almost the same as if to a small property. And today, if you just did it on commission basis, that large property is a lot more attractive, which means that you're going to have a predisposition to try to sell in certain communities with higher values. So changing those incentive structures internally I think is an important way to really serve the goals of the CRA.
And I'm looking forward to the conversation, that...the Treasury is supposed to be coming out with some recommendations in a couple of months, and I'm really eager to see what they look like so it can allow us to have a good conversation.
Shaffer: Great. Mike, I want to toss one out to you—are there any risks that are particular to the Southeast banking environment?
Johnson: Well, one of the things that I think is really reflective of the Southeast is, it's very much a microcosm for the country itself. But having said that, I already mentioned commercial real estate, which a lot of is the bread and butter for a lot of the banks in our district. So that's one reason why it's important for us here at the Atlanta Fed to maintain our knowledge and expertise in this space, so we can effectively supervise our institutions, as well as provide information and be transparent with respect to our own research.
The other thing that I think is a bit unique about the Atlanta Fed...we do have Florida—and Miami, in particular—in our district. So trade finance is another area that is a bit unique for us. But along with those international relationships, that also brings enhanced bank secrecy/anti–money laundering risk, for institutions that are actively engaged in those businesses.
I mentioned a couple of things here. That's not to say that folks aren't managing those well, but they're unique areas of focus for us here in the Atlanta district.
Shaffer: Right. Raphael, again—you spoke with bankers recently. What has surprised you most about the Atlanta Fed district, also known as the Sixth District?
Bostic: For me—and Mike talked a little bit about this as well—the urban-rural divide in the district is one that is pretty stark, and it's consistent across the entire district. So it's gotten me to start thinking about, how do we conceive of our role as the Federal Reserve to serve both in a way that is equally effective, so that both types of regions can make progress? The CDIAC meeting was really helpful in that regard, to really bring to the ground a number of the challenges that we see in some of our smaller markets.
And I talk to our economists all the time about this as well. I'm giving a speech tomorrow, actually, on the urban-rural divide, and we're going to talk about some of the implications for local cities, local communities, for business opportunities. And these are all really important for banking because they could be growth opportunities. But they could, if not done well, also represent some clouds on the horizon and perhaps some risk. So that's been really interesting, and it's gotten me to think about my role in a very different way, and I'm really enjoying that.
Shaffer: Great, great. Speaking of clouds on the horizon—Mike, I have a question for you—what has been the effect of the hurricanes recently on the banking industry?
Johnson: Oh, that's a great question, Lali. Thanks to either you or one of our audience members for teeing that up. First, let me start with the fact that we're really grateful and blessed that our employees here at the Atlanta Fed were able to weather the storm personally. And so I think that's the most important thing, and for everyone out there in the audience. I hope you can say the same for your family, friends, and employees—that's first and foremost.
Second, the industry, I thought, responded very, very well in efforts to either maintain facilities and access to credit—and in particular, in these types of events, access to cash. And I would also say "thank you" to many of our own staff that work in the cash area, that worked long and hard to make sure that liquidity, essentially, was available during the crisis.
So for the industry, you see a couple of things. One is that physical facility, they're...particularly in the Houston area, I know a number of branches that are taking a little bit longer to come back online, and so on. From a credit standpoint, I don't have final figures or aggregate numbers that I can give you. But you often see an increase in loan loss provision expenses associated with weather events like this, and we have seen some of that—I think more in the Houston area than we did in the Miami area, because of the impact of flooding, which tends not to be, for many people, an insurable event, so that leads to some losses in that space.
But by and large, nothing material, nothing significant, nothing that's going to pose outsized risk. And frankly, nothing that may not be recaptured in a timing difference as insurance money comes back, construction increases, and those all present lendable opportunities going forward. So by and large, both physically from a people perspective, and also from a financial perspective, the industry has weathered both storms very, very well.
Shaffer: Great. So we spoke about that, and we also mentioned financial technology and cyber risk. We do have a question, and either of you can take it here: how might the rise of peer-to-peer payments over platforms like Apple Pay alter the role that banks play in person-to-person transactions? Any worries about regulating those, either of you?
Bostic: So I definitely have worries about that. For me, it's not so much the function but the risk to the resilience of the system. The more of these transactions that occur outside of an area where we have authority or monitor, if something were to go wrong in that segment, that limits our ability to respond in real ways. So the worry I have is that so much goes on, and to the extent that an increasing amount occurs in areas where we don't have eyes, then it's hard for us to ensure that the resiliency of the broader system continues.
Just last week we had a number of meetings about exactly this issue, and trying to start a conversation about what should our role be. Does this mean that we need to directly provide the service? Does it mean that we need to expand the scope of institutions that we have an ability to look at and engage with, to understand what they're doing? I think we're—at least, I'll speak for myself—I'm at a very early stage in having a clear understanding of that. But this is one of our frontline issues, I think, in the next two or three years, because the system is evolving quite rapidly.
Johnson: Obviously, I'm not going to disagree with you. [laughter]
Bostic: Feel free, go ahead.
Johnson: Well, I'll do that privately. [laughter] But just to add one other element from the banking industry perspective—clearly, payments, in large part, is what a bank is. And to the extent payments becomes disintermediated outside of the banking system, I think that poses a big strategic risk for the industry, to ask ourselves: why do we still have a bank if payments is increasingly done outside of the banking system? And I think there are a lot of good reasons to still have a bank, and a lot of good reasons to have a strong payments infrastructure within a regulated environment, such as a bank, but it doesn't have to be limited to a bank. But I think, for me, there are the systemic risks and issues that Raphael talked about, as well as the strategic relevance questions for the banking industry as a whole.
Shaffer: Great. Raphael, one of your many hats is monetary policy: what have been your impressions of the FOMC [Federal Open Market Committee] meetings?
Bostic: They've been super interesting. The Fed presents and projects this unanimity of views when we make our statement. But what I found in the FOMC meetings is people come with their own views, and that there's a diversity of them. And we all get together and we learn from each other in a way that allows us to come up with a consensus view of what the right policy at that time is.
A second thing that has really struck me, as I've been thinking about how do I make sure that the Sixth District adds value to these meetings, is that while everyone gets information—the same information about GDP and inflation, all that kind of stuff—we try really hard to bring a different kind of information, which is information from people we talk to on the ground—business leaders, bankers, community-based organizations—and we have a network to collect information from dozens and dozens of people in every FOMC cycle. I've been to I think four FOMC meetings now, and in every meeting there's been at least two or three stories that I've gotten from those conversations that have informed the information that I bring.
And so they've been very interesting. And I'm really looking forward to continuing to bring the things that we're seeing in the Sixth District to the board table in Washington, to help make sure that we have the best policies we can.
Shaffer: Great, great. What do you know about [Jerome] Powell, and how his approach might differ from that of [Janet] Yellen?
Bostic: So, first of all, I have enjoyed working with both of them. Chair Yellen has been very welcoming to me and very helpful in getting me acclimated in a very, very close way. Governor Powell has been overseeing Bank operations, so I work with him a lot, too. And what I would say is, he's very collegial—I've really enjoyed working with him, I've learned a lot from him. And my expectation is that we're going to continue to have a really well-functioning FOMC and Federal Reserve System.
He's different from Chair Yellen on some of the regulatory things, but I think on the big-ticket items about the importance of capital, the importance of continuing stress tests, and those sorts of things—I don't think that we're going to see radical changes. There may be some differences about the frequency of some of these things. But for me, I'm going to argue, if I can get any hints that there's a weakening of capital requirements, that that is going to be problematic—that will increase our risk system-wide—and I think...I'm hoping he'll be receptive to those sorts of arguments.
Shaffer: Well, that actually is the last question that I have for you. I would like to say thank you to both Raphael and Mike today. A few notes—this webcast is a complement to our column "ViewPoint," found under Economy Matters, and Mike will actually have an Economy Matters podcast in December. Also, our next Banking Outlook Conference is on February 22, where we will hear from experts across the industry, and Raphael will be our keynote speaker. As always, we have more information on our website. We look forward to seeing you on the next ViewPoint Live, and this concludes today's webcast.