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Banking

Introduction | Spotlight: Banker Outreach | Spotlight: Basel III | State of the District | National Banking Trends


Spotlight: Banker Outreach Forum

Atlanta Fed Hosts Banker Outreach Forum
On August 10, the Federal Reserve Bank of Atlanta hosted a Banker Outreach Forum that convened bankers from north Georgia, north Alabama, and east Tennessee to discuss the evolving business of banking. The interactive forum included audience polls and facilitated discussion on such issues as profitability and risk management.

Lockhart on five trends in banking
Atlanta Fed President Dennis Lockhart opened the forum by highlighting several trends—for some, challenges—that he believes will shape the banking sector. The first—pressure to achieve economic scale—is a trend that will likely intensify over time. "There is, and I think increasingly will be, a scale below which it is going to be very difficult to compete," Lockhart noted, pointing to such challenges as finding a skilled workforce, investments in technology, and compliance costs. Another key challenge will be "crafting a business model that delivers growth with safety and earnings power," he said.

Last, banks will have a deeper appreciation for technology in the coming years. Not only will harnessing technology help banks to build leaner and more efficient business models, but it will also play a greater role in the interface between banks and their regulators, Lockhart noted. As such, "an investment in technology, I think, is simply a fact of life going forward."

Claire Tucker, president and chief executive officer of CapStar Bank, echoed some of these challenges in her remarks. Tucker represents the Sixth Federal Reserve District on the Community Depository Institutions Advisory Council (CDIAC), a committee established by the Federal Reserve Board in 2010 to gather insights and concerns on a range of issues from community bankers across the country. Tucker encouraged bankers to share their concerns for her to bring to the CDIAC's semiannual meeting in Washington, D.C.

On profitability: Where's the smart money?
The first of two interactive polling sessions was centered on profitability and included questions such as:

  • Who are community banks competing against for business?
  • What is the greatest challenge facing the banking industry?

Perhaps not surprisingly, the majority of bankers in the audience identified regulation as the greatest challenge facing banks in the coming year and pointed to consumer compliance as the most costly regulatory burden.

The unintended consequences of these new regulations were also a source of concern. As one banker noted, the new rules are driving a trend toward oversimplification because "it's going to be too expensive to figure out how to have products and services that serve a wide variety of needs."

Amid heightened regulations, community banks are also facing fierce competition from larger, regional banks and, to some extent, credit unions. In the case of regional institutions, size and access to capital are their greatest advantage. Since community banks can't compete on price, they are seeking other ways to compete, audience members noted. One such avenue is to merge with other community banks because, as facilitator Katie Edge said, "Size does matter." Edge is a partner with the regional law firm Butler Snow.

Regulation and competition have led banks to search for profitability in a very narrow niche. Indeed, a key source of loan demand is coming from the real estate sector, the audience poll indicated. Commercial real estate loans especially have been a key source of demand, which has supervisors concerned about concentration risk. Forum participants addressed that topic in further detail in the second session.

Risk management: Where's the smart money?
Although the banking industry continues to face significant challenges, most banks are doing better, said Atlanta Fed Senior Vice President Mike Johnson. "We've come a long way over the last couple of years," he said. Indeed, although roughly 45 percent of banks in the Atlanta Fed's district are in "less than satisfactory" condition, the good news is that more than half of them are doing fine.

Johnson, who leads the Bank's supervision and regulation division, opened the risk management session by highlighting some of the issues on supervisors' radar screens. They include the debt situation in Europe, community banks' exposure to the commercial and residential real estate markets, and regulatory and compliance risk.

Risk management was a fitting topic for banks, because as Edge noted, "to talk about risk management is to talk about banking." While most bankers rated their capacity to analyze risk as good to fair, several key concerns crystallized during the open discussion. Interest rate risk, especially with regard to banks' long-term portfolios, was a persistent concern. Banks have different ways of managing this risk, however. Some are relying on interest rate analytics, for example, while others are taking an enterprise approach.

Higher capital requirements have also been a challenge. Many community banks find themselves with limited access to capital, and for many, the board of directors is the first place they turn. But so-called board fatigue about capital has also become an issue. The adverse banking conditions of the past several years have worn on directors and shareholders, to the point that "they decided to sell out," Edge explained. "It is part of the nature of this crisis."

Other sources of external capital included existing shareholders and public offerings. One concern with this avenue, however, is whether banks can offer the kinds of returns that investors are seeking.

On a more positive note, poll responses indicated that asset quality is improving for many banks. At the same time, banks identified continued weakness in the labor market as one of the greatest risks to asset quality in the coming year. Unfortunately, a robust recovery is not in the forecast. Indeed, "I think you have to assume it's going to be a slow slogging," Lockhart said in his closing remarks. He ended with this piece of advice for banks, inspired by a favorite Olympic sport—"don't drown, stay afloat, kick like hell, and don't forget to breathe."