Banking Conditions, Regulatory Updates Discussed in New "ViewPoint"

September 30, 2020

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

I think you will agree with me that the last six months have been challenging, to say the least! Although this period remains a trying time for the economy and our nation, I remain encouraged by how the banking industry has pivoted to address the economic challenges brought on by the pandemic. Recently, the Board of Governors reaffirmed its commitment to use its full range of tools to support the economy for as long as needed. As regulators, we also continue to listen and look for ways to support responsible lending. More to come on that later, but first, we take a look at the State of the District.

The State of the District
Despite the pandemic, asset quality ratios in the second quarter were little changed from the end of 2019, due in part to forbearance programs that were instituted to assist borrowers. Although earnings declined slightly compared to the previous year, they were also slightly higher than the prior quarter, as many firms reported higher fees related to Paycheck Protection Program (PPP) lending. This one-time earnings boost offset a third consecutive quarter with net interest margin contraction for community banks. Capital levels fell modestly at community banks as well but remain well above regulatory requirements. As forbearance periods and government support expire, third- and fourth-quarter results should reveal more about the impact of the COVID shutdown on banking conditions. We will be keeping a close watch on these quarters for more clarity related to the financial performance of the banking sector.

While straying slightly from the State of the District theme, this seems an appropriate time to also mention that on September 17, the Board released hypothetical scenarios for a second round of bank stress tests. The Board's first round of stress tests found that large banks were well capitalized under a range of hypothetical events. Regulators are conducting an unprecedented additional round of stress tests in the fourth quarter due to the continued COVID-related uncertainty, and these tests will provide more information on the resiliency of large banks. In times like these, when downside risks and uncertainty are hallmarks of the environment, banks of all sizes must remain vigilant, consistently test and challenge assumptions, and actively consider capital conservation strategies.

Community Reinvestment Act (CRA)
Now let’s turn to the important recent developments regarding the CRA. I hope you saw that on September 21, the Board released an advanced notice of proposed rulemaking (ANPR) that will seek feedback on our proposed approach to modernize the regulations that implement the CRA. The goal is to ensure that the CRA remains a strong, effective tool to address systemic inequities in access to credit and financial services for low- and moderate-income and minority individuals and communities. With the ANPR, the Federal Reserve hopes to build a foundation for the banking agencies to come together on a consistent approach to the CRA that has the broad support of the intended beneficiaries as well as banks of different sizes and business models. We welcome the opportunity to discuss the ANPR at any time and encourage you to submit comments on the proposal. The comment period ends 120 days after publication in the Federal Register. Please feel free to contact us for more information.

Outreach Activities
Transparency, listening, and staying in touch are always top priorities for us. To this end, we have offered and will continue to offer virtual events focusing on different aspects of supervision for state member banks. Most recently, we hosted a ViewPoint Live session on consumer compliance considerations during the COVID-19 pandemic. The expiration of forbearance periods exposes a potential minefield of consumer compliance issues. Comprehensive risk management is key to ensuring fair treatment of consumers and compliance with requirements. We also discuss the CRA ANPR mentioned above.

Earlier webinars included “Supervisory Posture Update during the COVID-19 Pandemic” and “’We Support the Flow of Credit’: Behind the Scenes of the Discount Window.” The Board of Governors is also hosting virtual events—and, of course, don’t forget the Ask the Fed sessions. We’ll continue to provide details as they become available.

Federal Reserve Support
We remain ready to lend to support your efforts to assist customers. While the Small Business Administration’s PPP program has ended, banks can continue to pledge loans to the PPP Liquidity Facility. In addition, the Main Street Lending Program is open for business, with recent adjustments allowing broader access for small and medium-sized businesses and nonprofit organizations. Regulators recently updated the program’s frequently asked questions to clarify the Board and Department of Treasury's expectations regarding lender underwriting and address supervisory expectations for lenders originating Main Street loans.

In closing, as always, we welcome your comments or questions. Ongoing feedback from the industry is critical as we work together to respond to the pandemic. Once again, please, do not hesitate to contact us as we work together to manage this challenge. Please share your feedback at

photo of Michael Johnson
Michael E. Johnson

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