Banking Conditions, Regulatory Updates Discussed in New "ViewPoint"
By Michael Johnson, Executive Vice President
Supervision, Regulation, and Credit
Federal Reserve Bank of Atlanta
In my last letter, I encouraged everyone to hang in there, as we are beginning to see some light at the end of the tunnel. Today, while our Federal Reserve examinations are still being conducted off-site, there are positive signs for a possible shift to “normalcy” later in 2021 given the widespread access to vaccines. Reports indicate that the vaccines are effective in reducing infection rates and limiting the severity of illness if people become infected. Similarly, additional financial support—including extensions of modifications and moratoriums on foreclosures and evictions—has served as an economic vaccine for those businesses and households most affected, allowing fourth quarter financial results to remain stable, and we expect that the economy will continue to improve as the virus is contained. However, there are still many uncertainties. As always, State of the District provides an update on current conditions.
State of the District
Consistent with national trends, earnings among Sixth District community banks were stable at year-end, with continued improvements in liquidity and stable asset quality that limited provision expenses. Median return on average assets was 0.97 percent, basically unchanged over all four quarters in 2020 and down 13 basis points from the fourth quarter of 2019. Asset quality was healthy as of December 31 reporting. Although the percentage of loans reported as past due 30–89 days increased slightly from the prior quarter, it was still below levels seen in the fourth quarter of 2019, prior to the pandemic. The percentage of loans past due 90 days or more dropped to a record low level, reflecting, in part, the aid provided to borrowers in 2020 and suspension of negative credit reporting through the CARES Act. At year-end, capital ratios remained satisfactory for a majority of community banks within the Sixth District. Liquidity remained strong in the fourth quarter, as the median on-hand liquidity ratio among community banks in the District rose to 27.8 percent, the highest level in more than 16 years. Firms are keeping a close eye on the net interest margin, as low rates persist, and loan demand is generally weak.
Banking Outlook Conference: The Supervision, Regulation, and Credit Division recently held its annual Banking Outlook Conference. The virtual event was well received and allowed us to reach a broader audience. In fact, it was so successful that we plan to include virtual access options at future conferences. We provided updates on economic trends, conditions in real estate, and current expected credit losses (commonly known as CECL) implementation. Federal Reserve Board vice chair for supervision Randal Quarles gave the keynote address, highlighting the importance of stress testing in supervision and regulation, and the Graduate School of Banking at Louisiana State University sponsored a roundtable discussion of regional banking conditions. Our website has additional information on the agenda and meeting materials.
Financial Markets Conference: The Center for Financial Innovation and Stability will present the 25th annual Financial Markets Conference, titled "Fostering a Resilient Economy and Financial System: The Role of Central Banks," on May 17–18, 2021. A livestream will be available on the Atlanta Fed’s YouTube channel. You can register to receive more information here.
Supervision and Regulation policy update
See below for highlights from the first quarter. Additional information on recent announcements regarding supervision and regulation can be found on the Board of Governors website.
- On March 29, the Board posted Frequently Asked Questions Regarding Perpetual Preferred and Non-voting Stock to the Partnership for Progress website. The FAQs clarify the regulatory capital treatment of perpetual preferred stock and voting common shareholders’ equity and advise the public to rely on the capital rule and the Small Bank Holding Company and Savings and Loan Holding Company Policy Statements, as applicable, as the definitive authority for regulatory capital requirements. Partnership for Progress is a Federal Reserve System program created to preserve and promote minority-owned institutions and enhance their ability to thrive in an increasingly competitive banking environment.
- On March 19, the Fed announced that the temporary changes to the supplementary leverage ratio (SLR) would expire as intended on March 31. The Board expects to issue a request for comment on adjustments to the ratio soon.
- On March 11, federal banking agencies released additional interagency questions and answers regarding private flood insurance.
- On March 9, federal bank regulators issued a rule supporting Treasury's investments in minority depository institutions and community development financial institutions.
- On February 25, federal banking agencies issued the Shared National Credit Review report.
- On February 12, the Board released hypothetical scenarios for the 2021 bank stress tests.
In closing, although we still face uncertainty, it seems the future is looking up! Though we are currently maintaining our remote examination posture, we look forward to seeing everyone in person in some capacity in the near future. We will stay in touch regarding our plans. Please feel free to reach out at any time to ViewPoint@atl.frb.org. Best wishes for good health!