April 3, 2023

By Joe Davidson, Senior Vice President
Supervision, Regulation, and Credit
Federal Reserve Bank of Atlanta

Dear colleagues,
I would like to start by wishing Doris Quiros the very best in her retirement as she passes on the baton to me as the new head of supervision and regulation at the Atlanta Federal Reserve District. During the recent Banking Outlook Conference, as I transitioned from helping to lead supervision and regulation at the Chicago Fed to heading up the Atlanta Fed’s division, I had the pleasure of meeting several bankers, and this year I look forward to engaging with those who couldn’t attend.

Given the events in the banking sector over the past few weeks, I think it’s important to begin with emphasizing the statement that Michael Barr, the Fed’s vice chair for supervision, made in his recent testimony: “Our banking system is sound and resilient, with strong capital and liquidity.” Regulators continue to investigate the circumstances leading up to the failure of Silicon Valley Bank (SVB) and Signature Bank, and they continue to identify the implications of the failure, including firm-specific factors, as well as supervisory oversight and regulatory requirements that applied to the banks. The circumstances surrounding the failure of these banks, including the rising interest rate environment, are stark reminders for banks to monitor concentration risks of all kinds, as well as to sufficiently focus on risk management around interest rates and liquidity, including diversified contingency funding plans.

The Federal Reserve continues to closely monitor the banking system. We have been in close contact with Sixth District banks to understand what they are experiencing in the current banking and financial environment and any actions they may be taking in response to industry developments. You are welcome to reach out directly to your central point of contact with information you think would be helpful to share that has not already been shared through our outreach.

On March 12, 2023, the Federal Reserve Board announced the creation of a new Bank Term Funding Program (BTFP). The BTFP offers loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par, offering some relief for banks with investments portfolios hit hard by rising interest rates. A loan request can be submitted via the BTFP website. In addition, the discount window website has been updated with information on the newly established BTFP, including the borrowing term sheet, FAQs, email template, and other relevant documents.

Banking Outlook Conference
I enjoyed meeting bankers who were able to attend the Banking Outlook Conference on February 23, 2023. Our theme this year, Back to the Future, cut across industry groups, and we heard from regulators, bankers, and industry experts on the seismic shifts occurring in the financial services industry. In some cases, those shifts have been jumpstarted by innovation and technological advances, but we also heard how business and consumer preferences continue to evolve in virtual environments.

A panel of industry leaders shared their perspectives on strategic change management and partnership. They explored the importance of maintaining a competitive edge and its role in outperforming those resistant to change. To bring about productive and sustainable change, governance, leadership alignment, and effective communication are instrumental.

The community bankers panel, which was moderated by our partners at the Graduate School of Banking at LSU, revealed some of the ways bankers are managing their talent pool with an eye toward succession planning, especially for potential mergers and acquisitions. If you are interested in viewing a replay of the panel or other conference sessions, or if you would like to subscribe to Federal Reserve publications and other events, please email supervision@atl.frb.org.

State of the District
Our quarterly State of the District section assesses Sixth District banks’ earnings and financial positions, among other snapshots of their condition, as of December 31, 2022.

Third-party risk management
Third-party relationships can provide smaller banks access to new products, services, and technology. The scope of these partnerships can be quite broad, including fintech companies, partners who use the bank's "banking as a service" products, cloud service providers, and many others. However, third-party partnerships designed to bring innovation to a bank can also create challenges in risk management and due diligence, particularly with respect to identifying the risks a third-party partner may pose and managing those risks.

The Federal Reserve and other federal banking agencies can play an important role in helping banks continue to innovate through third-party partnerships. Specifically, the agencies have been working to develop joint guidance to clarify regulatory expectations around third-party risk management, which will be an important step in supporting innovation built on third-party partnerships.

As 2022 comes to an end, the nation's community bankers have largely turned their focus to traditional concerns related to the economy, technology, and competition from nonbank providers as reflected in this year's Conference of State Bank Supervisors' National Survey of Community Banks. The survey of 500 bankers, conducted April through July 2022, addressed questions about the challenges and opportunities they face in the industry. The bankers surveyed cited net interest margins and economic conditions as the top external risks they face, which is not terribly surprising given that the survey was conducted during a period of the highest inflation in 40 years.

Although rising interest rates do provide an opportunity to increase margins, there are substantial risks, too. Loan demand remains a concern, but less so than last year, and it is virtually tied with regulation and the cost of technology as a major risk. Overall perception of operational risks declined from last year, however, cybersecurity, staff retention and technology implementation are risks that still concern surveyed bankers.

All banks should understand regulatory expectations with respect to due diligence, risk management, and ongoing compliance when engaging in third-party relationships. Banking regulators can support this approach by providing clear expectations and the tools smaller banks may need to help them meet these expectations. For example, in 2021 the Federal Reserve began providing state member banks with supervisory reports on their third-party partners that are subject to supervision under the Bank Service Company Act. These reports contain information that may help assess the performance of bank service providers, depending on the services used and the risk the services pose. As we consider additional opportunities to provide resources concerning third parties, your feedback and experience would help us understand where we should focus our efforts.

Resources and events

  • The online course Bank Directors' Desktop is a primer on the duties, responsibilities, and key roles of bank directors. It is an excellent tool for new directors who want to learn more about what is expected of them in their new role, and also for seasoned directors who might want a refresher on different elements of their role.
  • The Southeastern Micro Labor Workshop brings together PhD-level micro labor economists from southeastern institutions to foster an active exchange and discussion. This event will be held at the University of Georgia on March 30 and 31, 2023.
  • The Atlanta Fed’s annual Financial Markets Conference, whose theme this year is “Old Challenges in New Clothes,” will take place from May 14–17, 2023.
  • Save the date for the 2023 Community Banking Research Conference, which will be held in person at the Federal Reserve Bank of St. Louis on October 4–5, 2023. The conference committee is interested in research that explores all topics related to community banking, and it especially welcomes empirical and policy-oriented papers. Each paper selected for the conference will be considered for the John W. Ryan Award, which recognizes the paper making the most significant contribution to banking research. The conference committee invites papers or detailed abstracts that explore all aspects of community banking, and submissions can be made here.
  • When financial institutions prepare for instant, real-time payment offerings, the key risk management components they should consider are liquidity risk management, third-party risk management, and fraud and compliance risk management. Read more about how to prepare for these risks here.
  • The Federal Reserve announced that the FedNow Service will start operating in July and has offered additional details on the service’s launch preparations.

Supervisory and regulatory updates
Here, I want to share some regulatory guidance and webinars that provide relevant information on the banking sector this quarter.

  • Read recent guidance on crypto-asset risk here.
  • On February 23, 2023, federal regulators made a joint statement on liquidity risks to banking organizations resulting from crypto-asset market vulnerabilities, which you can read here.
  • In a recent Ask the Fed session, our real estate experts discussed Residential Real Estate : Housing Market Correction—Trends and Emerging Risks in the Year. (In addition, the Atlanta Fed’s commercial and residential real estate experts offer their commentaries via articles, webinars, and podcast episodes.)

In the coming weeks and months, I look forward to speaking to and meeting with District bankers in person to further facilitate an open, active dialogue about the emerging issues and risks affecting community banks.


photo of Joe Davidson
Joe Davidson

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