My coworkers and I recently returned from the RMA’s Annual Conference held at the Marriott Wardman in Washington DC. This conference is always a good one and this year was no exception. The general sessions included a presentation by Mark Zandi, Moody’s Analytics Chief Economist; and the Keynote Speaker was David Gregory, the Moderator from NBC News’ Meet the Press. There was also a regulator panel that included representatives from the Federal Reserve, OCC, & FDIC.
I have had the pleasure of hearing Mr. Zandi speak many times. He is an incredibly brilliant man for whom I have tremendous respect. In my opinion, his sense of humor is one of his best personality traits. Being able to make an audience laugh while delivering news that the economy has a 40% chance of sliding back into another recession takes real skill!
The regulator panel was represented by Jack P. Jennings, II from the Federal Reserve, Darrin Benhart from the OCC, and Chris Spoth from the FDIC. The panel answered numerous questions that were previously submitted by attendees as well as some impromptu questions by the audience.
Below, I’ve paraphrased their remarks on key topics.
Forward Looking Risk Management
What Benhart (OCC) said on this topic…
Lagging indicators, such as nonaccrual, past due, and criticized/classified loan levels, did not serve us well during this banking crisis. In the future, there should be more emphasis on capital planning and every institution should have a realistic grasp of its vulnerabilities. Institutions should define and monitor pertinent “Early Warning Indicators,” such as cap rate spreads, average leverage on large deals, results of stress testing, etc.
Lagging indicators, such as nonaccrual, past due, and criticized/classified loan levels, did not serve us well during this banking crisis. In the future, there should be more emphasis on capital planning and every institution should have a realistic grasp of its vulnerabilities. Institutions should define and monitor pertinent “Early Warning Indicators,” such as cap rate spreads, average leverage on large deals, results of stress testing, etc.
Jennings (Federal Reserve) added…
When it comes to forward looking risk management, expectations are different for smaller institutions. The regulators are currently working on new guidance for stress testing in community banks.
When it comes to forward looking risk management, expectations are different for smaller institutions. The regulators are currently working on new guidance for stress testing in community banks.
Spoth (FDIC) pointed out…
Acting FDIC Chairman Martin Gruenberg is currently focused on the approximately 7,000 institutions that have total assets less than $1Billion.
Acting FDIC Chairman Martin Gruenberg is currently focused on the approximately 7,000 institutions that have total assets less than $1Billion.
For information on the FDIC’s initiative you can read Mr. Gruenberg’s speech to the American Banker on September 19, 2011. http://www.fdic.gov/news/news/speeches/chairman/spsep1911.html
Frequent Issues/Challenges
Spoth (FDIC) mentioned these frequent issues…
Credit risk and the overhang in real estate exposure. Appraisals are not always necessary for workout situations unless there is new money granted to the borrower. Cash flow is the major consideration. TDR’s by definition have a credit weakness. It is always classified as Substandard? One way to answer this question is to ask yourself, “Is there risk to the bank’s capital account?”
Credit risk and the overhang in real estate exposure. Appraisals are not always necessary for workout situations unless there is new money granted to the borrower. Cash flow is the major consideration. TDR’s by definition have a credit weakness. It is always classified as Substandard? One way to answer this question is to ask yourself, “Is there risk to the bank’s capital account?”
Benhart (OCC) brought up…
There are lots of complaints right now. A major challenge is trends in underwriting due to low loan demand and the competition for loans.
There are lots of complaints right now. A major challenge is trends in underwriting due to low loan demand and the competition for loans.
Emerging Risks
Jennings (Federal Reserve) said…
There is legitimate concern over CRE concentrations. Another concern is whether institutions are performing risk assessments for new products. Agricultural lending also has some very legitimate price concerns currently.
There is legitimate concern over CRE concentrations. Another concern is whether institutions are performing risk assessments for new products. Agricultural lending also has some very legitimate price concerns currently.
Spoth (FDIC) said…
Institutions should determine if/how the agricultural market affects them; nonbank investments may potentially be driving up land prices. Interest Rate Risk is a concern and there is new guidance. New products and third party vendors can also present new risks, and institutions should be concerned with what those risks could be.
Institutions should determine if/how the agricultural market affects them; nonbank investments may potentially be driving up land prices. Interest Rate Risk is a concern and there is new guidance. New products and third party vendors can also present new risks, and institutions should be concerned with what those risks could be.
Community Banks Feel Overly Criticized
Spoth (FDIC) pointed out…
The market is extremely tough for community banks right now and we have tremendous empathy. There are over 800 banks on the problem bank list but most won’t fail. The earnings cycle is very tough. The FDIC is the predominant regulator for community banks and Acting Chairman Gruenberg has a year long focus to answer the questions:
The market is extremely tough for community banks right now and we have tremendous empathy. There are over 800 banks on the problem bank list but most won’t fail. The earnings cycle is very tough. The FDIC is the predominant regulator for community banks and Acting Chairman Gruenberg has a year long focus to answer the questions:
- What are the models that work?
- What are the challenges?
- What are the solutions?
Benhart (OCC) added…
The OCC has an increasing emphasis on community banks due to their thrift responsibilities.
The OCC has an increasing emphasis on community banks due to their thrift responsibilities.
Jennings (Federal Reserve) explained…
Federal Reserve Governors Duke and Raskin have their roots in community banks. Governor Raskin has formed a subcommittee of the Board which is very active. They meet every two weeks and sometimes more frequently. Each Federal Reserve District has also established a Community Depository Institution Advisory Council (CDIAC) pursuant to the Dodd-Frank Act. These committees will have input on the economy, lending conditions, and other community bank issues.
Federal Reserve Governors Duke and Raskin have their roots in community banks. Governor Raskin has formed a subcommittee of the Board which is very active. They meet every two weeks and sometimes more frequently. Each Federal Reserve District has also established a Community Depository Institution Advisory Council (CDIAC) pursuant to the Dodd-Frank Act. These committees will have input on the economy, lending conditions, and other community bank issues.
For more information on these committees you can refer to the website for each Federal Reserve Bank such as: http://www.frbatlanta.org/news/pressreleases/staffdirectors/110318.cfm
Where Should Efforts Be Focused Now?
Spoth’s (FDIC) advice to insitutions…
Efforts should focus on loan workouts, securing more capital now, the overhang in residential credits, and holding properties.
Efforts should focus on loan workouts, securing more capital now, the overhang in residential credits, and holding properties.
Jennings (Federal Reserve) said…
Real estate issues and commercial real estate. There are also concerns on the residential side due to the long slog in the housing market with servicer issues. The agency supports looking for revenue growth.
Real estate issues and commercial real estate. There are also concerns on the residential side due to the long slog in the housing market with servicer issues. The agency supports looking for revenue growth.
Benhart (OCC) agreed…
Bankers are facing a lot of issues right now. He recommended focusing on the core business processes that usually center on lending, underwriting, and risk tolerance. Institutions should be asking themselves, “Where are we comfortable with setting risk limits? What are the take-aways from stress testing?”
Bankers are facing a lot of issues right now. He recommended focusing on the core business processes that usually center on lending, underwriting, and risk tolerance. Institutions should be asking themselves, “Where are we comfortable with setting risk limits? What are the take-aways from stress testing?”
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