Atlanta Fed Supervision Head Discusses Banks, Payments, and the CRA

July 5, 2022

By Doris Quiros, Senior Vice President
Supervision, Regulation, and Credit
Federal Reserve Bank of Atlanta

Dear colleagues,
On May 22, 2022, the Fed released its most recent Supervision and Regulation Report, which summarizes banking conditions and the Federal Reserve's supervisory and regulatory activities, in conjunction with semiannual testimony before Congress by the vice chair for supervision. This report was released for year-end 2021, and the economic environment has since changed. The broadening of inflation suggests that we're not getting enough support from the supply side, which means that the Federal Reserve is going to have to be more muscular in its policies, which makes it equally important for your banks to remain vigilant with your credit portfolios. While employment continues to grow, rebalancing the labor market will be crucial to lowering inflation toward the Fed's 2 percent objective. The recent resurgence in COVID infections also indicates the ongoing risks and lingering uncertainty, and we can expect bumps along the path to normal economic activity and public policy.

State of the District
According to data from the first quarter 2022 call report, community banks (those with assets less than $10 billion) showed emerging strains in the current economic environment, with an increasing percentage of community banks—just below 5 percent in the current quarter—reporting losses. Earnings at community banks in the Sixth District weakened in the first quarter of 2022, following the typical seasonal decline in the fourth quarter of 2021. On a median basis, return on average assets (ROAA) dropped to 0.87 percent, the lowest median reported since 2017. Reflecting that decline, a greater percentage of banks reported ROAAs below 1 percent.

Balance sheet growth also slowed at community banks in the first quarter. Aggregated annualized balance sheet growth was down 4.3 percent, the largest drop in more than two years and the first decline since the third quarter of 2020, when stimulus money started flowing through the banking system. Community banks have generally struggled with generating loan demand outside residential real estate. Shifts in loan demand and deposit levels have helped stabilize the capital leverage ratios. On a median basis, capital levels remain healthy and exceed the ratios required to be considered well capitalized. Liquidity for most community banks in the Sixth District remained healthy and a source of strength during a period of rising rates. Our quarterly State of the District section assesses Sixth District banks' earnings and financial position.

FedNow rules finalized
On May 22, 2022, the Federal Reserve Board finalized a comprehensive set of rules that governs funds transfers over FedNow. It provides legal certainty and clarity on the rights and obligations of parties to a transfer over the service. Demand for instant payments is growing in the United States due to a culture of on-demand services, transparency, and fulfillment. The FedNow Service will provide a safe and efficient payments infrastructure that is critical to enable financial institutions of all sizes to offer customers the ability to send and receive money, around the clock, 365 days a year.

A recent Federal Reserve Survey indicates that seven out of 10 consumers use mobile payment devices to send or receive payments, and 83 percent are using a fintech payment app or digital wallet occasionally to complete transactions. It is evident that consumers are more eager than ever to integrate digital payments into their lifestyles. Through the FedNow pilot program, the Federal Reserve has officially started bringing pilot participants onto the FedNow Service, signaling that the initial testing phase of the pilot program is under way. A few organizations have now successfully connected and delivered test messages. The pilot sets the stage for thousands of financial institutions to be up and running with instant payments in 2023, including those that work with third-party payment providers. During the coming months, pilot organizations will continue coming aboard the service, establishing connectivity, and performing technical and operational tasks that will lay the groundwork for full-scale, end-to-end testing later this year. It's exciting to see the new payment rail becoming a reality, and you can take a guided virtual tour to learn more about instant payments.

In the June 9, 2022, episode of the Talk About Payments webinar series, leaders from the Boston Fed's Project Hamilton provided a detailed overview and current status of the central bank digital currency project.

CRA modernization
The three federal financial regulatory agencies on May 5 released proposed updates to the Community Reinvestment Act (CRA). The CRA is one of the major statutory means of making bank loans accessible, particularly to communities and individuals that have historically faced discrimination in credit availability. The act has not been substantially updated since 1995, and the banking landscape has changed dramatically since then. Hence, the goals of the CRA reform initiative that are due to commence will include:

  • Strengthening the achievement of CRA's purpose by promoting community engagement and financial inclusion and increase the emphasis on smaller-value loans and investments that can have high impact on low- to moderate-income communities.
  • Adapting to changes in the banking industry by including the geographic areas to include online and mobile banking, branchless banking, and hybrid models.
  • Providing greater clarity, consistency, and transparency for activities that help financial institutions meet CRA requirements, such as affordable housing activity.
  • Tailoring CRA evaluations and data collection to bank size and type allowing smaller banks to have the option to be evaluated under aspects of the new proposed framework.
  • Maintaining a unified approach among regulators after taking into consideration the extensive feedback from stakeholders.

Changes to regulations, especially those as significant as CRA, are best made after robust public comment and engagement. I encourage all stakeholders to take advantage of the public comment period before August 5, 2022, to ensure that the final rule that is ultimately crafted benefits from a diverse set of views and input. On Wednesday, May 11, 2022, the agencies jointly hosted a special Ask the Fed webinar for all CRA stakeholders that provided an overview of the proposal and its objectives.

The future of supervision
As the industry transforms, bank supervision is also evolving, and we recognize that our workforce, processes, and technology must change for supervision to remain effective, transparent, and timely. Consistent with the Financial Transparency Act of 2021, introduced in the US House Committee on Financial Services, our leaders at the Board of Governors are investigating future trends and conducting industry research to ensure that we develop a supervision strategy for the future. We are focused on our ability to anticipate and respond to industry changes and how we can work together to continually improve. This ability means changing how we execute supervision, as well as how we more effectively use our resources and talent to execute our mission and meet the needs of our stakeholders.

Board of directors at each Reserve Bank play an important role in the effective functioning of the Federal Reserve System. They participate in the formulation of monetary policy by sharing diverse perspectives on business activity, labor markets, and credit conditions in each Reserve Bank. In addition to providing grassroots economic information used in Federal Open Market Committee policy deliberations, directors serve as Fed ambassadors, helping to communicate the Fed's mission in their communities. I encourage you to get to know the leaders who represent you in your community. At the Atlanta Fed, we value the input they provide.

Resources
I want to share some webinars that provide relevant information on the banking sector this year. In March 2022, the Federal Reserve Board conducted a data and connectivity symposium to explore the transformation of financial services resulting from digitization and new data-driven business models.

  • If your institution crossed $10 billion in consolidated assets this year, you can learn about the regulatory approach changes for regional institutions here.
  • You can view the June 23 Ask the Fed regional banking outreach event, “Are we headed for a soft landing?” (You can also view the session archives there.)
  • The Atlanta Fed held the Financial Markets Conference in May to discuss emerging financial market issues and their monetary policy implications.
  • The Atlanta Fed's commercial and residential real estate experts offer their commentaries using these tools in our articles, webinars, and podcast episodes.

Have a great summer!

Yours sincerely,

photo of Doris Quiros
Doris Quiros

Senior Vice President, Supervision, Regulation, and Credit
The Federal Reserve Bank of Atlanta