Southeast Banking in the Financial Crisis...This expansion fueled demand for housing, retail...

Federal Reserve Bank of Atlanta 2009 Annual Report

Southeast Banking in the Financial Crisis

Southeast Banking in the Financial CrisisFederal Reserve Bank of Atlanta 2009 Annual Report

Contents

2 LetterfromthePresident4 TheStoryoftheYearinSoutheast BankingIsBothComplexandSimple22 Milestones25 SixthFederalReserveDistrictDirectors38 SixthFederalReserveDistrictOfficers

TheFederalReserveBankofAtlantaisoneoftwelveregionalReserveBanksintheUnitedStatesthat,togetherwiththeBoardofGovernorsinWashington,D.C.,makeuptheFederalReserveSystem—thenation’scentralbank.SinceitsestablishmentbyanactofCongressin1913,theFederalReserveSystem’sprimaryrolehasbeentofosterasoundfinan-cialsystemandahealthyeconomy.

Toadvancethisgoal,theAtlantaFedhelpsformulatemonetarypolicy,supervisesbanksandbankandfinancialholdingcompanies,andprovidespaymentservicestodepositoryinstitutionsandthefederalgovernment.

ThroughitssixofficesinAtlanta,Birmingham,Jacksonville,Miami,Nashville,andNewOrleans,theFederalReserveBankofAtlantaservestheSixthFederalReserveDistrict,whichcomprisesAlabama,Florida,Georgia,andpartsofLouisiana,Mississippi,andTennessee.

2

Letter from the President{Followingtheturmoiloflate2008involvingverylargefinancialinstitutionsandtheinterbankmarket,manybanksexperiencedayearofupheavalandfinancialpres-surein2009.Homeforeclosures,commercialrealestaterevaluations,andarangeofothercreditqualityproblemscametoaheadformanyfinancialinstitutionsdespiteencouragingsignsthatthefinancialsystemasawholehadstabilizedandadeepandprotractedrecessionwasfinallycomingtoanend. Thisyear’sannualreportexamineshowmanysmallerandmidsizedbanksintheSoutheastrespondedtoaseriesofrealestateproblemsexacerbatedbyseverejoblosses,slumpinghouseholdincomes,andwidespreadbusinessuncertainty. FinancialandeconomicchallengesintheSoutheastweremagnifiedbythehighconcentrationofrealestateinvestmentinaregionthathadgrownaccustomedtostrongpopulationandincomegrowth.Formanyyearsleadinguptotherecentreces-sion,buildersanddevelopersprofitedfromfavorabledemographicandeconomictrendsforSunbeltstates.In-migration,homebuilding,andassociatedmanufacturingindustrieslikefurniture,textiles,andhouseholdappliancesfueledgrowth,andtheSoutheasthadconsistentlyoutpacedtherestofthecountrybyarangeofeconomicmeasures.Developmentinsomecoastalmarketswasevenmorerobust. Butfortunesreversed,andgrowthintheSoutheastwasslowerthaninthenationasawholein2009.UnemploymentintheAtlantaFed’ssix-stateregionwasslightlyhigherthannationally.Theaftermathofthehousingbusthasbeenespeciallychal-lengingforsoutheasternbanks—fromsmallcommunitybankstoregionalfirms.In2009,forty-twobanksfailedintheSoutheast,andGeorgialedthenationinthenumberofbankfailures,althoughnotintermsofassets.NearlyeightysoutheasternbanksreceivedcapitalinfusionsfromU.S.TreasuryDepartmentprograms,althoughafewbegantopaybackthesefundsbyyear’send. Tofurtherthefinancialsector’spathtorecovery,theFederalReservebolsteredtroubledhousingmarketsbypurchasinglargevolumesofagency-guaranteedmort-gage-backedsecurities,alongwithagencydebtandTreasurysecurities.Also,theFedkeptthefedfundsrateexceptionallylow,atjustabovezerofortheentireyear,andwasexplicitindescribingthispolicy.Whilethelowfedfundsratewasamacro-

Banking Issues in the Southeast

http://www.frbatlanta.org/pubs/annualreport/ar2009/bankingissues.cfm


3

Dennis P. Lockhart, president and

chief executive officer

economicmonetarypolicymeasure,italsofacilitatedbanks’effortstorepairtheirbalancesheets. Bankers,regulators,andlawmakersin2009beganworkingtowardbuildingabetterpostcrisisfinancialsystem.Bankerslearnedmanypainfullessonsfromthefinancialcrisisandhavebeenforcedbacktobasics.BankersIhavespokenwithsaytheyunderstandtheneedtorefocusonstrengtheningriskmanage-mentandcapitalandliquiditybuffers. Regulators,meanwhile,arerefiningtheirapproachtofinan-cialsupervisioninsomenotableways.Forexample,thecrisishasmadecleartheneedforgreaterhorizontalsupervision.Thisapproachconsidersinterconnectionsamongfinancialfirmsandthewaysthoseinterconnectionscouldaffectthebroaderfinancialsystemandeconomy.Foranother,supervisorsaretransitioningtomoreforward-lookingevaluationsofindividualinstitutions’safetyandsoundness. Actingonthoselessons,theAtlantaFedbeganreorganiz-ingitssupervisionandregulationoperations.Theaimistomakethesupervisoryfunctionmoreflexible,forward-looking,andclearincommunicatingitsmessagesandexpectationstothestaffandtheinstitutionstheysupervise. Onthelegislativefront,Congressinitiateddeliberationsonproposalstoreformournation’sfinancialregulatorystructure.Aparticularfocusofthisdebatehasbeenonpreventingisolatedproblemsfromcausingbroaddamagetothefinancialsystemandeconomy.Legislatorsdiscussednumerousandmultifacetedmeasures,includingideasthatwouldaltertheFed’sdutiesinbankingsupervision.Inmyview,theFedshouldcontinuetoplayastrongroleinthenation’sfinancialsupervision,notonlytohelppreventandmitigatepotentialcrisesbutalsotoeffectivelyserveasaliquidityproviderintimesofstress.OnlytheFedcanactaslenderoflastresortbecauseonlythemonetaryauthoritycanincreasethemoneysupplyinanemergency.Tomakesounddecisions,thelenderoflastresortneedsintimate,hard,qualita-tiveknowledgeofindividualfinancialinstitutions,theirconnect-ednesstocounterparties,andthecapacityofmanagement. Atthetimeofthiswriting,theoutcomeofthedebateonfinancialreformandtheresultinglegislationisunclear.Itisvitalthattheregulatoryregimeforthefuturetrulystrengthensourdefensesagainsttherecurrenceoffinancialcrises.

DennisP.Lockhart

4

Althoughthesourcesofthecrisiswereextraordinarilycomplexandnumer-ous,afundamentalcausewasthatmanyfinancialfirmssimplydidnotappreciatetheriskstheyweretaking.Theirrisk-managementsystemswereinadequateandtheircapitalandliquiditybuffersinsufficient.Unfortunately,neitherthefirmsnortheregulatorsidentifiedandremediedmanyoftheweaknessessoonenough.

—FederalReserveChairmanBenBernanke,December2009

Theyear2009wasoneofstabilizationforthefinancialsystemandrecoveryfortheU.S.economy.YetintheSoutheastthebankingsystemfaredworsethaninpreviousyearsandworsethanbanksinmostotherregions.Thisannualreportexamineswhathappenedtosoutheasternbanks,explorescausesoftheproblems,andassessesfactorsthatwillshapethefutureofbankinginstitutionsintheregion. Thestorytoldisbothcomplexandsimple.Thefinancialcrisisassociatedwiththeeconomicdownturnthatbeganin2007resultedfromhighlycomplicatedandinterrelatedfactors.Thesefactorsincludegrowthinthemarketformortgage-backedsecuritiesandcomplexinvestmentinstruments,unusuallylargeamountsoflever-agebyhouseholdsandfinancialinstitutions,deteriorationinriskmanagementbyfinancialinstitutions,thegrowthofoff-balancesheetactivitiesbymanybanksandoftheunregulated“shadow”bankingsystem,aflawedbusinessmodelforthehousing-relatedgovernment-sponsoredenterprises,regulatoryissues,andtheglobalsavingsglut.(Seethesidebar“FannieMaeandFreddieMac:Past,present,andfuture”onpage6.)Scholarswilllikelyspendyearsuntanglingtherootcauses.Atthesametime,theproblemsformosttroubledsoutheasterninstitutionswerestraight-forward,involvingrealestate. Thisreportdoesnotdelveintothenumerousissuesthatbroughtonthelargerfinancialcrisisbutinsteadfocusesonreasonsfortheproblemsthatplaguedmany

The Story of the Year in Southeast Banking Is Both Complex and Simple


5

smallandmidsizedbanksintheSoutheast.Inthisreport,“Southeast”referstothestatesofAlabama,Florida,Georgia,Louisiana,Mississippi,andTennesseeintheirentirety. TheimmediateproblemthatdamagedmanysoutheasternbankswasessentiallythatmanybankslentheavilytobuildersanddevelopersbeforeitbecameclearthattheSoutheast’slongjobs-and-buildingboomwasending.Insomecases,institu-tionsstrayedfromtheirownguidelinesconcerningassetallocationbytakingonaheavyconcentrationinrealestateloans(seechart1).Inaddition,corporategover-nancemayonoccasionhavebeentoolenientorevenabsent.Finally,atmanyofthetroubledinstitutions,muchofthelendingwasfundednotbytraditionaldepositsbutbymorevolatileandsometimesmoreexpensivebrokereddeposits. Thegeneraloperatingassumptionthatprevailedinfinancialinstitutionsbeforethecrisiswasthatthepopulationinfluxwouldcontinue,buyerswouldkeepsnap-pingupspeculativehouses,andthereforedevelopersandbuilderswouldmakeprofits,repaytheirbankloans,andborrowmoremoneytobuildmorehousestoaccommodatethegrowingpopulation.Butthisvirtuouscircleeventuallybroke.Whenitdid,financialregulatorsbymanyaccountsdidnotmoveaggressivelyenoughtoanticipatethedownwardcycleoritsscopeanddepth.Inretrospect,bankexam-inersfoundthemselveswithtoolsthatprovedinadequate.Neithertheguidanceoncommercialrealestatelendingnorseparateguidanceconcerningnontraditionalmortgageproductsincludedspecificlimitsonthoseactivities.Likewise,neitherguidanceincludedminimumcapitalrequirements. ForbanksintheSoutheast,theconsequenceshavebeenstark.Threeperfor-mancemeasuresmakethisclear:• Failures:SevenbanksinthesixstatesoftheSoutheastfailedduring2008and

forty-twofailedin2009,afteronlytwofailuresinthepreviousfiveyears.• Earnings:Afteramassingcumulativeprofitsexceeding$50billionfrom2002

through2007,FDIC-insuredfinancialinstitutionsbasedinthesixstateslost$8billionin2009and$8.8billionin2008,accordingtodatacompiledbytheFed-eralDepositInsuranceCorporation(FDIC)frombankcallreports.

• Loan quality:Attheendof2009,theregion’sfinancialinstitutionsreportedacombined$4.4billioninloansninetyormoredayspastdue,morethantripletheamountattheendof2006andsixtimesthelevelattheendof2004.Southeastbanksended2009with$29.7billioninassetsnolongeraccruinginterest,eleventimestheamountattheendof2006.

Before the recession, an economic boomThesenumbersevidenceadramaticreversal.Intheyearsprecedingthefinancialcrisis,vigorouseconomicgrowthhadcreatedarobustbankingenvironmentacrossmuchoftheSoutheast.Indeed,rapidpopulationandjobgrowthpoweredtheregionaleconomy.ThepopulationoftheSoutheasthadmorethandoubledsince1960,reach-ing46.2millionandfaroutpacinggrowthinthecountryasawhole.Florida’spopula-tionalonegrewnearly300percent,to18.3million,whilethenation’spopulationincreasedby68percent.FloridaandGeorgiawereamongthenation’smostprolificjobsmachinesbeforetheeconomicdownturnbeganin2007.Intotal,theregioncre-ated5.3millionnetjobsduringthedecadeandahalf(seechart2onpage7).

Southeast

18%

Rest of nation

Chart 1Bank Loans Portfolios - Exposure through Q4 2009

All loans secured by real estate

Source: Bank call reports, 2009 Q4

Comercial and industrial loans (including agricultural loans for small banks)

Credit card

Other consumer

All other loans and leases

8.5%

15.4%

5.4%6.1%

1%

72.2%

57.7%

9.4%

6.3%

Chart 1Bank loan portfolio exposure

Note: Data are through the fourth quarter of 2009.Source: Bank call reports

Bank Failures in Georgia

http://www.frbatlanta.org/pubs/annualreport/ar2009/bankfailures.cfm

6

Thisexpansionfueleddemandforhousing,retailcenters,officespace,andotherrealestate.Lowinterestratesandeasyaccesstocreditfurnishedtheidealbackdropforrapidresidentialandcommercialrealestatedevelopment.Consequently,realestatelendingproliferated,andnewbanksopenedacrossthesoutheasternregiontojoinwithexistinginstitutions. Onaverage,afinancialinstitutionopenedintheSoutheastalmosteveryweekfrom2000through2007,foratotalof327newbanks.MostofthemwereinFlorida,Georgia,andTennessee(seechart3onpage7).Between2001and2007,thesethreestatesrankedsecond,third,andfifthamongallstatesinbankandthriftformations.Morethan60per-centofthosenewinstitutionswerecharteredbystatebankingdepartments.Theregionintotalwashometo26percentofthenation’snewbankandthriftformationsduringtheseyears,accordingtotheFDIC.Thoughthisfiguremayseemhigh,itisnotfaroutoflinewiththegrowthoftheregion,astheSoutheastaccountedfor22percentofthena-tion’spopulationincreaseinthoseyears,accordingtoCensusBureauestimates. Theabundantfinancinghelpedtofeedthebuildingboom.AmongGeorgia’sFDIC-insuredinstitutions,CRElendingincreasedalmosteighttimesfrom1999totheendof2007,accordingtoFDICdata.Florida-basedbanks’loanstobuylandandbuildincreasedaboutfivetimesduringtheperiod1999–2006(seechart4onpage9).Atthesametime,manybanksbasedoutsideofFloridaenteredthatmarkettotakeadvantageoftherealestatedevelopmentboom,amovethatfurtherfueledincreasesincreditanddevelopmentintheSunshineState. Residentialdevelopersputthemoneytouse.AccordingtotheU.S.CensusBureau,Floridadevelopersappliedfor959,948housingpermitsfrom2003through

Editor’s note: This is an excerpt from Atlanta Fed economist W. Scott Frame’s April 2009 working paper, “The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac,” available online at frbatlanta.org/pubs/wp/working_paper_2009-13.cfm.

FannieMaeandFreddieMacaregovernment-sponsoredenterprisesthatplayacen-tralroleinU.S.residentialmortgagemarkets.Inrecentyears,policymakersbecameincreasinglyconcernedaboutthesizeandrisk-takingincentivesofthesetwoinstitu-tions.InSeptember2008,thefederalgovernmentintervenedtostabilizeFannieMaeandFreddieMacinanefforttoensurethereliabilityofresidentialmortgagefinanceinthewakeofthesubprimemortgagecrisis.ThispaperdescribesthesourcesoffinancialdistressatFannieMaeandFreddieMac,outlinesthemeasurestakenbythefederalgovernment,andpresentssomeevidenceabouttheeffectivenessoftheseactions.Lookingahead,policymakerswillneedtoconsiderthefutureofFannieMaeandFreddieMacaswellastheappropriatescopeofpublicsectoractivitiesinprimaryandsecondarymortgagemarkets.u

Fannie Mae and Freddie Mac: Past, present, and future

FactReal estate as a percentage of net loans and leases in three southeastern states:· Florida—70 percent in 1999 to

a high of 80 percent in 2008· Georgia—67 percent in 1999 to

a high of 87 percent in 2009· Alabama—62 percent in 1999

to a high of 74 percent in 2006 and 2007

Source: FDIC


7

2006,morethanthenumberofpermitsappliedforintheentirecountryintheyear2008.ThedropinFloridapermitrequestsfrom2005to2009wasdramatic,fallingfromapeakof287,250downto35,329.InmetropolitanAtlanta,theSoutheast’sfastest-growingmetroareabeforetherecession,officialsissuedanaverageofabout68,000residentialbuildingpermitseachyearfrom2000through2006(seechart5onpage9).Tolendsomeperspective,theentirecityofTallahassee,Florida,hasalittlemorethan68,000housingunits,accordingtoU.S.Censusdata.

Recession brings a new reality TheSoutheast’sbanksrodethecrestofthiseconomicwavethroughthe1990sandearly2000s,interruptedonlybythe2001–02recession.Butasthismostrecentcrisishaltedandthenreversedtheregion’sonce-spectacularjobgrowth,residentialdevelopmentoutstrippeddemand.Perhapsnowhereweretheeffectsofslowingjob

0

2,000

4,000

6,000

8,000

1990 1995 2000 2005 2010

Chart 2Payroll employment

Florida

Alabama

Georgia

LA

Mississippi

Tennessee

Note: Numbers are in $thousands.Source: U.S. Bureau of Labor Statistics

Alabama

Florida

Georgia

Louisiana

Mississippi

Tennessee

Louisiana

Georgia

Tennessee

Mississippi

Florida

Alabama

Chart 2Payroll employment

Alabama

Florida

Georgia

Loiusiana

Mississippi

Tennessee

0

40

80

120

Florida Georgia Tennessee

Chart 3 New banks established in three southeastern states, 2000-07

Note: The total number of new banks established in the Southeast during this period was 327, including 28 in Alabama, 6 in Louisiana, and 7 in Mississippi. Source: FDIC

Chart 3New banks established in three southeastern states, 2000–07

Source: U.S. Bureau of Labor Statistics

Note: The total number of new banks established in the Southeast during this period was 327, including 28 in Alabama, 6 in Louisiana, and 7 in Mississippi. Source: FDIC

The region’s many “pipe farms” are visual evidence of the sudden drop in housing construction in 2008.

8

growthmoreapparentthaninFlorida.AsofDecember2009,thestatehadshedroughly920,000jobssinceitspeaknonfarmemploymentinMarch2007,accordingtotheBureauofLaborStatistics.Withfewerjobstopursue,fewerpeoplemovedtothestate.Inanastoundingturnabout,fromJuly2008toJuly2009,morepeopleleftFloridathanarrived,accordingtoU.S.Censusdata.Itwasthefirsttwelve-monthperiodinsixty-threeyearsinwhichFloridalostpopulation. Theeffectofslowingin-migrationontheSoutheast’shomebuildingindustrywassobering.So-called“pipefarms”litteredplaceslikemetroAtlanta.(Theterm“pipefarms”referstolandthatdevelopershadgradedandplantedPVCpipesinforsubdivisionsthattheywouldnowneverbuild.)Theinventoryofthearea’spartiallydevelopedvacantlotssoaredfromatwenty-onemonths’supplyduring2005tomorethantenyears’worthbytheendof2008,accordingtoaFederalReserveInspectorGeneral’sreportonafailedmetroAtlantabank.Eighteentotwenty-fourmonthsisconsideredanacceptableinventory.Housingconstructioncametoavirtualstandstillduring2009.Forinstance,inmetropolitanAtlanta,builderssecured6,533constructionpermits,downfromapeakof74,007in2004. Theheavyconcentrationinrealestatelendingbecameproblematicformanyoftheregion’sfinancialinstitutions.Asthehammersandsawsfellsilent,theSoutheastshoulderedadisproportionateshareofbankfailures.Theregion’sforty-twofailedinstitutionsin2009accountedfor36percentofthenationwidetotal,whichismorethandoubleitsshareofU.S.banks.Intermsofassets,theregion’sbankinginstitu-tionsattheendof2009accountedfor6.7percentofthetotalassetsofallFDIC-insuredinstitutionsnationally. ThestateofGeorgialedthenationinbankfailuresin2008and2009,withtwenty-fivefailedinstitutionsin2009andfivein2008.Three-fourthsofthemwerebasedinmetropolitanAtlanta.MostofGeorgia’sfailedbankswererelativelysmall,withlessthan$1billioninassets.Relativelynewbankswerealsohitparticularlyhard.Amongforty-ninesoutheasterninstitutionsthatfailedin2008

{

AtlantaFedeconomistLarryD.WallrepublishedinApril2010anarticleoriginallypublishedin1993ontheFederalDepositInsuranceCorporationImprovementActof1991(FDICIA).Thepaper,“Toobigtofail:Nosimplesolutions,”saysthattheintentofthelegislationwastoreducetaxpayers’exposuretofinancialsystemlosses,includingtheirexposuretotoobigtofailfinancialinstitutions.Wallnotesinanewprefacetothearticlethattherecentfinancialcrisisdemonstratedthattoobigtofailhasstillnotbeeneliminatedfortheverylargestbanks.

WhiletoobigtofailhasnotdirectlyaffectedtheSixthDistrict,thenegativeeffectsfromthenationalissuehavecasttheirshadowonushereintheSoutheast.Thearticleisavailableonlineatfrbatlanta.org/cenfis/pubscf/vn_no_simple_solutions.cfm.u

Too big to fail

Relatively new banks were also hit particularly hard. Among forty-nine southeastern insti-tutions that failed in 2008 and 2009, twenty-two were less than ten years old.


9

and2009,twenty-twowerelessthantenyearsold.FifteenofthesewerebasedinmetropolitanAtlanta. ThesmallsizeoftheSoutheast’sfailedinstitutionsdidnotposesystemicrisksofthekindassociatedwithmuchlargerfinancialinstitutionsthatfailedorrequiredsub-stantialpublicaid.However,thesheernumberoffailuresoftenunsettledcommunitiesandbankcustomersandimposedacumulativecosttotheFDICdepositinsurancefund(DIF)ofmorethan$3billion,accordingtoFDICestimatesasofMarch2010.AmongtherecentbankfailuresintheSoutheast,onlytwohadassetsofmorethan$10billion,andneitherwasclosetothesocalled“too-big-to-fail”range(seethesidebar“Toobigtofail”onpage8).Thus,thetoo-big-tofailconundrumhasnotbeenpredominantinthisregion.

Real estate loans falterBytheendof2009,loanssecuredbyrealestateaccountedfor82percentofassetsthatwereninetyormoredayspastdueatFDIC-insuredinstitutionsheadquartered

0

10

20

30

40

Alabama Florida Georgia Louisiana Mississippi Tennessee

Chart 4Cumulative construction and land development loans

Note: Numbers are in $billions, and are from FDIC-insured institutions based in the Southeast.Source: FDIC

1999

2004

2007

Chart 4Cumulative construction and land development loans

Note: Numbers are in $billions, and are from FDIC-insured institutions based in the Southeast.Source: FDIC

Source: U.S. Census Bureau

–60

–40

–20

0

20

2001 2002 2003 2004 2005 2006 2007 2008

Chart 5Building permits in the Southeast

Year

–ove

r–ye

ar p

erce

nt ch

ange

Alabama

Florida

Georgia

Louisiana

Mississippi

Tennessee

Louisiana

Mississippi

Tennessee

Alabama

Florida

Georgia

Chart 5Building permits in the Southeast

Source: U.S. Census Bureau

FactOf $29.7 billion in assets not accruing interest at the South-east’s FDIC-insured institutions at the end of 2009, $27.3 billion, or 92 percent were secured by real estate.

Source: FDIC

10

DifferenttypesofbankingorganizationsintheUnitedStatesarecharteredandregu-latedbydifferentfederalandstateagencies.

The Federal Reserve(“TheFed”)istheprimarysupervisorforbankholdingcom-panies,includingfinancialholdingcompanies;stateFederalReserve-memberbanks;EdgeandAgreementcorporations;andstate-licensedforeignbanksoperatingintheUnitedStates,alongwithforeignbanks’representativeofficesintheUnitedStates.

The Office of the Comptroller of the Currency(OCC)charters,supervises,andregulatesnationalbanksandfederallylicensedforeignbankingoperationsintheUnitedStates.

The Federal Deposit Insurance Corp.(FDIC)istheprimaryfederalsupervisorandregulatorofnonmemberstatebanks,somesavingsbanks,andcertainstatelicensedandfederallylicensedforeignbanks.

The Office of Thrift Supervision(OTS)supervisesandregulatesthriftholdingcompanies,savingsbanks,andsavingsandloanassociations.

Statesalsomaintainfinancialregulatoryagenciesthatsupervisestate-charteredbanksandcertainotherstate-licensedfinancialinstitutionssuchasinsurancecom-paniesandnonbanklenders.

The National Credit Union Administration(NCUA)charters,supervises,andinsuresfederalcreditunions.

ThefollowingtableisabreakdownofinstitutionsheadquarteredintheSixthFederalReserveDistrict,asofDecember31,2009:

Entity type Primary regulators Institutions/ 2009 failures Nationalbanks OCC 142/7Federalsavingsbanks OTS 62/6Savingsandloanassociations OTS 26/0State-charteredmemberbanks Fed,FDIC,States 54/5State-charterednonmemberbanks States 731/24State-charteredsavingsbanks States,FDIC 6/0Statecreditunions States,NCUA 357/0Federalcreditunions NCUA 508/0

Who regulates whom?


11

intheSoutheast.Thoseproblemrealestateloansamountedto3.6percentoftotalequitycapital.Thatfigureismorethantripleboththeleveloftroubledrealestateloansattheendof2006andtheamountrelativetocapital. Florida-basedinstitutionscarriedthehighestlevelofrealestateassetsninetydays-pluspastduerelativetocapital,at4.85percent.Louisianabankshadthelowestlevelofproblemrealestateassetscomparedtocapital:1.68percent.Georgiainstitutionsasagroupshowedthelargestthree-yearincrease:325basispoints(seechart6).

Reviews: Real estate caused most failuresForeachbankfailureresultinginanFDICpayoutexceedingthegreaterof$25millionor2percentofaninstitution’sassets,theinspectorgeneral(IG)oftheresponsibleregulatoryagencymustexaminethecausesoffailureandissueamateriallossreview

Alabama

Florida

Georgia

Louisiana

Mississippi

Tennessee

0

400

800

1,200

1,600

2,000

2006 2009

Chart 6Southeastern loans 90 days past due

Notes: Numbers are in $millions, and are from Institutions based in the Southeast.Source: FDIC

Chart 6Southeastern loans 90 days past due

Notes: Numbers are in $millions, and are from Institutions based in the Southeast.Source: FDIC

The Atlanta Fed took several measures in 2009 to keep the foreclosure crisis in its sight, including tapping into the Real Estate Analytics team, planning the Real Estate Research blog to cover foreclosure issues and other real estate topics, enhancing the bank’s online foreclosure resources for consumers, and launching the Foreclosure Response podcast series. (Go to frbatlanta.org.)

12

(MLR).(ThefederalregulatoryagenciesaretheFDIC,theFederalReserve,theOfficeoftheComptrolleroftheCurrency[OCC],theNationalCreditUnionAdministration[NCUA],andtheOfficeofThriftSupervision[OTS].Seethesidebar“Whoregulateswhom?”onpage10.)AsoftheendofJanuary2010,theIGshadissuedMLRsonnine-teensoutheasterninstitutionsthatfailedin2007,2008,and2009.TheseMLRsalmostinvariablyidentifyexcessiverealestatelendingastheprimarycauseoffailure. Severalthemesrunthroughthereports.Inmanycases,asalreadynoted,failedinstitutionsviolatedtheirownguidelinesregardingbothmanagementandboardofdirectors’oversightofoperationsandhowmuchoftheirportfoliocouldbedevotedtoanysingleindustryorcategory.TheIGreportsattestthatafewfailedinstitutionsfalsifiedinformationincallreportsthattheyfiledwithregulators. Notsurprisingly,themostcommonthreadamongtheMLRsisafocusonprob-lemsrelatedtorealestatelending.EighteenofthenineteenMLRsciteinadequateriskmanagementofaheavyconcentrationinrealestatelendingasaprimarycauseoffail-ure.ThisexcerptfromaFederalReserveIGreviewofaGeorgiainstitutionistypical:“TherisksassociatedwiththeADC[landacquisition,development,andconstruction]portfolioweremagnifiedbythespeculativenatureoftheresidentialconstructionloancomponent;93percentoftheseloansweremadetobuildersforconstructinghomesthatwerenotpre-sold.”Thebank’sowninternalpolicy,theIGreportadds,limitedsuchloansto60percentoftheresidentialconstructionloanportfolio. AnotherMLR,thisonefromtheFDIC’sOfficeofInspectorGeneral,saysaFloridainstitution“failedprimarilyduetobankmanagement’saggressivepursuitofassetgrowthconcentratedinhigh-riskCREloanswithinadequateloanunder-writingandalackofotherloanportfolioandriskmanagementcontrols.”

Other missteps plagued banksSomeinstitutionsencountereddifferenttypesofrealestatelendingdifficulties.Forexample,aGeorgialenderthatspecializedinloanstoredeveloplow-incomeneigh-borhoodsreliedtooheavilyonappreciationinpropertyvaluesattheexpenseofsoundunderwritingpractices,accordingtoanMLRbytheU.S.TreasuryDepartment’sOfficeoftheInspectorGeneral(seethesidebar“Depreciationorbadunderwriting?”onpage13).Inthereport,theIGcitesexamplesofloansoriginated“withnoconsider-ationofborrowercredit-worthiness,”includingonetoaborrowermadedaysafterheleftprisonformortgagefraud. InanotherTreasuryDepartmentMLR,theinspectorgeneraldescribeshowafailedFloridabankinstalledarelativeoftheownerasCEOin2004.Thisrela-tivehadnoexperiencerunningabank.AsCEO,hedirectedanaggressivegrowthstrategyrelyingonhigh-riskproducts.Evenasthebankincurredoperatinglosses,itcontinuedpayingdividendstoitsholdingcompany.Theholdingcompany’smajorityshareholderswerethebankownerandhisfamily.

Regulators also come in for criticismBankmanagersanddirectorsarenottheonlypartiesfaultedfortheirroleinthefinancialcrisis.MLRsfrequentlyreportthattheregulatoryagencieswerenotforce-fulenough.Meanwhile,membersoftheFederalReserveBoardofGovernorsandofficialsthroughouttheFedconductedacriticalself-examinationoftheFed’ssuper-

{They conclude that the foreclosure crisis was primarily driven by the severe decline in housing prices...not by a relaxation of underwriting stan-dards on which much of the prevailing lit-erature has focused.


13

visionandregulationfunction.Asaresult,theFedbeganin2009tochangehowitsupervisesfinancialinstitutions.(Seethesection“Unsparingself-assessments”onpage18.) NumerousMLRsnotethatregulatorsshouldhaveconsideredcompellinginsti-tutionstocurtailtheirloanconcentrationsinresidentialADC.AnFDICmateriallossreviewofafailedFloridadenovobanknotesthateventhoughanFDICexaminerrecommendedmorefrequentthannormalexaminations,neithertheagencynorstateregulatorsfollowedtherecommendationofquarterlyreviews.Instead,theFDICvisitedtheinstitutionthreetimesinthreeyears.“Moretimelysupervisoryaction,directedattheperformanceof[theinstitution’s]president/CEO,high-risklending,weakcreditunderwritingandadministrationpractices,andthebank’sincreasingriskshouldhavebeentakenasaresultoftheFDIC’s2006examination,”thereviewstates. AnOCCmateriallossreviewonanAtlantabankthatfailedin2009isequallystraightforward:“Until2008,OCC’sexaminationsof[thefailedbank]werenotadequateandallowedthebank’sriskylendingpracticestocontinueunabated.”TheIGaddsthatinFebruary2008,theOCCexaminerinchargehadstatedthatformalenforcementactionwaslikelyneededagainsttheinstitution,yettheagencydidnotenterintoaconsentorderwiththebankuntileightmonthslater. SomeofthecontentintheMLRsisclearlycriticaloffront-lineexaminers.Whethersupervisoryactionalonewouldhavepreventedtheoutcomesthatoccurredislessclear.TheFederalReserveIGstatesinareportthatcircumstancesataGeorgiacommunitybankwarranted“amoreforcefulsupervisoryresponse.”However,the

Editor’s note: This is an excerpt from “Decomposing the foreclosure crisis: House price depreciation versus bad underwriting,” a September 2009 working paper by Atlanta Fed economist Kristopher Gerardi, Boston Fed economist Paul S. Willen, and Adam Hale Shapiro, an economist with the Bureau of Economic Analysis. The paper is available online at frbatlanta.org/pubs/wp/working_paper_2009-25.cfm.

Theauthors,usingadatasetthatincludeseveryresidentialmortgage,purchase-and-sale,andforeclosuretransactioninMassachusettsfrom1989to2008,studythedramaticincreaseinforeclosuresthatoccurredinMassachusettsbetween2005and2008.Theyconcludethattheforeclosurecrisiswasprimarilydrivenbytheseveredeclineinhous-ingpricesthatbeganinthelatterpartof2005,notbyarelaxationofunderwritingstan-dardsonwhichmuchoftheprevailingliteraturehasfocused.Theyarguethatrelaxedunderwritingstandardsdidseverelyaggravatethecrisisbycreatingaclassofhomeown-erswhowereparticularlyvulnerabletothedeclineinprices.Intheabsenceofapricecollapse,theyconcludethattheemergenceofthisnewgroupofhomeownersinitselfwouldnothaveresultedinthesubstantialforeclosureboomthatwasexperienced.u

Depreciation or bad underwriting

FactIn 2009, commercial banks in the Southeast carried $132.7 billion in CRE loans. Banks with assets under $1 billion carried 42 percent, or $55.3 billion, of these loans.

Source: Bank call reports

14

reportalsonotesthatsucharesponsemightnothavematteredanyway.Giventhedeterioratingrealestatemarket,determiningwhethermoredecisiveregulatoryactionwouldhaveaffectedthebank’ssubsequentdeclineorthefailure’scosttotheDIFwasnotpossible,accordingtothereview. Onereasonisthatfederalregulatorypolicymakersdidnotissueguidanceonsubprimelendingandotherissuesuntiltheelementsthatcontributedtothecrisiswerefirmlyinplace.Andwhenthecrisiscame,thatguidancedidnotincludespecificlimitsonsubprimeandnontraditionalrealestatelending.Moreover,theideaofconductingforward-looking,“what-if”assessmentsofbanks’portfolioswasnotinstituteduntilthe2009SupervisoryCapitalAssessmentProgram(SCAP),thestresstestsofthenation’snineteenlargestbankingcompanies(seepage18).

Commercial real estate issues loomCommercialrealestate(CRE)marketswerecauseforcontinuingconcernthrough2009,exacerbatingtheproblemsassociatedwithtroubledrealestateloans.ThetotaldollarvalueofCREloansisconsiderablysmallerthanthatofresidentialrealestateloans.TheCREmarketisimportanttocommercialbanks,however,especiallythosewithlessthan$10billioninassets.TotalCREdebtinthecountryamountstoathirdofresidentialmortgagedebt,butbanksholdafargreaterportionofoverallcommer-cialrealestatedebtthanresidential,inpartbecauseinvestorstheworldoverholdsubstantialsecuritizedresidentialmortgagedebt(seechart7).Commercialbanks,infact,holdabout40percentofallCREdebtintheformofwholeloans,AtlantaFedPresidentDennisLockhartnotedinaNovember2009speech.Thatamountstoroughly$1.4trilliononbanks’books.SmallerinstitutionsholdalmosthalfofallCREloans,evenastheyaccountforonlyafifthofthenation’scommercialbankingassets,accordingtobankcallreportdata.TheFDICreportsthatsoutheasternbankswithassetsunder$1billionheldforty-twopercentoftheregion’stotalCREloans. TherecessionweakenedtheseCREportfolios.Simplyput,joblossesandaslowingeconomysappeddemandforCRE,leavingmoreofficespace,warehouses,shoppingcenters,hotels,apartments,andcondosemptyacrosstheSoutheast.In

0

50

100

150

200

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Chart 3Outstanding commercial mortgage-backed securities by vintage (year) - U.S. only ($Bls)

Partial interest-only

Source: Bloomberg

Interest-only

Balloon

Fully amortized

Chart 7Outstanding commercial mortgage-backed securities by vintage (yea r)—U.S. only ($Bls)

Source: Bloomberg

Smaller institutions hold almost half of all CRE loans, even as they account for only a fifth of the nation’s commercial banking assets . . . .


15

turn,rentalratesfell,reducingcashflowsforbuildingownersandmakingitmoredifficultforthemtoservicebankdebt.Thisproblemcouldbecomeevenmoresig-nificant.From2010through2012,tensofbillionsofdollarsincommercialmortgageswillbeupforrenewalbybanks.Inmanycases,thosepropertieswillbeworthlessthantheywerewhentheloansweremade,introducingnewchallengestothealreadystressedsmallerbanksaswellastheCREmarket. SomeSoutheastrealestatemarketssawsignsofequilibriumtowardtheendof2009.Asunsoldcondounitsandapartmentvacanciesmounted,buildersbegantak-ingoutfarfewermultifamilyconstructionpermits.ThroughouttheSoutheast,thenumberofapartmentandcondobuildingpermitsissueddeclinedonayear-over-yearbasisineverymonthfromApril2006through2009.Inaddition,inventorywasbeingabsorbedmorequicklyaspricesfellandsuppliesleveledoff.Forexample,salesofexistingcondosinFloridainDecember2009were91percenthigherthaninDecember

A national real estate slump following a development boom in the Southeast has left the region’s landscape dotted with empty retail space.

16

2008,albeitatan18percentlowermediansaleprice,accordingtotheFloridaAsso-ciationofRealtors.Thesamedynamicofhigheryear-over-yearsalesatlowerpricesheldineverymonthof2009intheSunshineState,thoughthepricedeclinesweresmallerlaterintheyear. Problemslingeredinothersectorsevenasthecondomarketshowedsomesignsofstabilizing.SomeSoutheastmarketsstillhadsubstantialnumbersofapartmentunitsunderconstructionas2009ended.Atlanta,Nashville,andTampaallhadmorethan2,500apartmentunits“inthepipeline”atyearend,accordingtoF.W.DodgePipeline/CBREEconometricAdvisors.Meanwhile,elusivejobgrowth,alongwithcompetitionfromdistressedhomesandcondoswhoseownersgaveuponsellinganddecidedtorenttheirproperties,alsohurtapartmentmarkets. Vacantofficespacealsoproliferated.Theconstructionboomearlyinthedecade,followedbypervasivejoblossesin2008and2009,sentvacancyratesclimbing.Bytheendof2009,sevensoutheasternmarkets—upfromjustthreeayearearlier—hadvacancyratesabove20percent. Muchthesamestoryplayedoutinindustrialrealestate.VacanciesacrosstheSoutheastbegantoclimbinlate2007andearly2008.Atthesametime,developmentslowedandrentsdeclined,forcesthatcontinuedthroughtheendof2009. Similarly,retailvacanciesrosethroughout2009.Inmanycases,shoppingcen-terswerenearlyemptyshellsasnearbyplannedsubdivisionswereneverfinished.Inthefourthquarterof2009,twenty-sixoftheregion’stwenty-eightlargestmarketssawretailvacancyratesclimbcomparedtotheyear-agoperiod,accordingtoREIS,acommercialrealestateresearchfirm(seechart8). TheseindicatorsofCREmarketweaknessareaconcerntobanks,andproblemCREloanscouldhindersmallerbanks’roleintheeconomicrecovery.ThesebanksmayhavetosetasidelargerreservesasacushionagainsttroubledCREassets.Thatactioncould,inturn,limittheamountofcredittheycanmakeavailabletothenumeroussmallbusinessesthatrelyonthemforfinancing.Withcredittightforsmallbusinesses,then,theirabilitytogrowandhirewouldbelimited,underminingoneengineofeconomicrecovery.

Source: CBRE Econometric Advisors, Axiometrics Inc.

Office

Retail

Warehouse

Apartment

0

5

10

15

20

1990 1993 1996 1999 2002 2005 2008

Vaca

ncy r

ates

(per

cent

age)

Chart 6Commercial real estate vacancy rates

Chart 8Commercial real estate vacancy rates

Source: CBRE Econometric Advisors, Axiometrics Inc.

{In looking ahead to 2010, the FDIC sees improving condi-tions for many banks, but also projects that there will be substantially more bank fail-ures through at least the third quarter of 2010. These are lag-ging results of the difficulties in commercial real estate loans.

For more information, go to http://www2.fdic.gov/qbp/index.asp

Returning to a Healthy Banking System

http://www.frbatlanta.org/pubs/annualreport/ar2009/returninghealthy.cfm


17

However,atthiswriting,someevidenceexiststhatmanysmallfirmsarenottakingonnewbankloans.ADecember2009AtlantaFedsurveyof206smallbusi-nessesintheSoutheastfoundthatnearlyhalfofrespondentshadnotsoughtaloanorlineofcreditfromabankinthepastsixmonths.Thereasontheycitedmostwasuncertainsalesprospects.Ofthosebusinessesthatsoughtcredit,about60percentsaidtheywereabletoobtainallormostofthebankfinancingtheyrequested.Notsurprisingly,constructionfirmshadthemostdifficulty.Seventypercentofthosethatsoughtcreditwereunabletosecureit.Itisimportanttokeepinmindthatsurveyrespondentsrepresentedestablished,relativelysuccessfulfirms. ItistruethattheCREproblemdoesnotappeartothreatenthebroaderfinancialsystemdespitetightcreditandunderwaterCREloans.ThesizeofCREdebt,asnoted,issmallerthanthatofresidentialrealestate,andtheexposureismoreconcentratedinsmallerbanks,whosefailuredoesnotposeasystemicthreat.Nevertheless,CREdebtadjustmentandresolutionisanimportantelementineconomicrebuilding,inlargepartbecauseoftherippleeffectonsmallbanksandthebusinessesthatrelyonthem. Recognizingthisfact,theFederalReserveandotherfinancialregulatoryagen-ciesinOctober2009updatedlongstandingguidanceregardingtheworkoutofCREloans.ThenewstatementcallsforabalancedandpragmaticapproachtoCREloanworkoutsandexaminerloanclassifications,consistentwithaccurateandtimelyrecognitionoflosses.Theguidanceisintendedtopromotesupervisoryconsistency,enhancethetransparencyofCREworkouttransactions,andensurethatsupervisorypoliciesandactionsdonotinadvertentlylimitcreditavailabilitytosoundborrowers.Properlydone,suchworkoutsareofteninthebestinterestofboththeinstitutionandtheborrower.Accordingtotheupdatedguidance,financialinstitutionsthatundertakeprudentloanworkoutarrangementsafterthoroughreviewsofborrow-ers’financialconditionswillnotbesubjecttocriticismfortheseefforts,eveniftherestructuredloanshaveweaknessesthatcauseadversecreditclassifications.

Signs of improvement emerge In2009,thegoalofbothbanksandtheirregulatorswastotrytoregainstability.Theyworkedtobolsterbanks’capitalandenhanceliquidityandmadesomeprog-ress.Measuresofcapitalfirmedup.Lateintheyear,signsthattheworstofloanqualityproblemscouldbeeasingintheSoutheast’sbankswereevident.Indeed,thefunctioningofinterbankandothershort-termfundingmarketsimprovedconsid-erably,interestratespreadsoncorporatebondsnarrowedsignificantly,pricesofsyndicatedloansincreased,andsomesecuritizationmarketsresumedoperation.Inaddition,equitypricesofbankswhosesharesarepubliclytradedincreasedsharply,onnet,sincetheirlowinearly2009. Evidencealsosuggeststhatfurthertighteningoflendingstandardsinmanyloancategoriesmightbecomingtoanend.AccordingtoaJanuary2010FederalReservenationalsurveyofseniorlendingofficers,commercialbanksgenerallyceasedtighteningstandardsonmanyloantypesinthefourthquarterof2009.Banks’policiesoncommercialrealestatelendingwereanexception,aslargefractionsofrespondentscontinuedtotightentheirCREcreditstandardsandtermsduringthequarter.Moreover,respondentshaveyettounwindtheconsiderabletighteningover-allthatoccurredovertheprecedingtwoyears

Sales of existing condos in Florida in December 2009 were 91 percent higher than they had been in December 2008.

A December 2009 Atlanta Fed survey of 206 small businesses in the Southeast found that nearly half of respondents had not sought a loan or line of credit from a bank in the past six months.

18

Creditqualityalsoshowedhintsofrecoveryinthefinalmonthsof2009.Forexample,acoupleoftheSoutheast’slargestbankinginstitutionsreportedinSecuri-tiesandExchangeCommission,orSEC,filingsthattheirvolumesofnewnonperformingloansdeclinedinthethirdandfourthquartersof2009fromthepreviousthree-monthperiods. Thesedevelopmentsreflectedapositivetrend:manyfinancialinstitutionswereclearingproblemassetsoffthebooksandsolidifyingtheircapitalbases.Severalaccessedvarioussourcesoffundingandraisedsignificantnewcapitalduring2009.TheFederalReserve’sSCAPstresstestsplayedarole.AfterSCAPresultswerereleasedinMay2009,thefirmsthattheSCAPdeterminedneededtoraisecapitalincreasedcommonequitybymorethan$75billion.OneofthetwosoutheasternfirmsthatparticipatedinthestresstesthasalsorepaidcapitalfromtheTroubledAssetReliefProgram,orTARP,asdidahandfulofsmallerinstitutionsintheregion. Depositorsalsoappearedmorecomfortable,improvingfinancialinstitutions’accesstocoredepositfunding.Concernsaboutthesafetyoftheirfundsduringtheimmediatecrisisof2008largelyabated,inpartbecauseofexpandedFDICguarantees.

Unsparing self-assessmentsThebankingindustryisstrivingtostrengthenriskmanagementmodels,tightenunderwritingstandards,fortifycapitalpositions,andregainsoundhealthandconsistentprofitability.Itremainsanopenquestion,however,whethertheindustryhasfundamentallychangedthewayitoperatesafteritsmostseverecrisisinnearly

Editor’s note: The following statements are excerpted from Federal Reserve Chairman Ben Bernanke’s speech to the Economic Club of Washington, D.C., on December 7, 2009. For the full text of the speech, go to federalreserve.gov/newsevents/speech/bernanke20091207a.htm.

First,allsystemicallyimportantfinancialinstitutions,notonlybanks,shouldbesubjecttostrongandcomprehensivesupervisiononaconsolidated,orfirm-wide,basis.

Second,whenasystemicallyimportantinstitutiondoesapproachfailure,gov-ernmentpolicymakersmusthaveanoptionotherthanabailoutoradisorderly,confidence-shatteringbankruptcy.TheCongressshouldcreateanewresolutionregime…towinddownatroubledsystemicallyimportantfirminawaythatprotectsfinancialstability.

Third,ourregulatorystructurerequiresabettermechanismformonitoringandaddressingemergingriskstothefinancialsystemasawhole.u

Regulatory reform principles

Lessons Learned

http://www.frbatlanta.org/pubs/annualreport/ar2009/lessonslearned.cfm


19

eightyyears.Ongoingissuescenteronthestrengthofthenation’seconomy,theoutcomeofchangesimplementedbyregulators,andlegislativereformsbyCongress.FederalReserveofficials,includingChairmanBenBernanke,havearticulatedasetofprinciplesthatintheirviewshouldunderliethenation’sregulatoryframework.(Seethesidebar“Regulatoryreformprinciples”onpage18.) FinancialregulatoryagenciesarealreadyundertakingwhatBernankecalls“unsparingself-assessments.”“AttheFederalReserveandotheragencies,thecrisisrevealedweaknessesandgapsintheregulationandsupervisionoffinancialinstitu-tionsandfinancialmarkets,”BernankesaidduringtheFebruary2010swearing-inceremonyforhissecondtermasFedchairman.“Workingtogether,theFedstaffandtheBoardhavemadeconsiderableprogressinidentifyingproblemsandimprovinghowwecarryoutouroversightresponsibilities.”

Healthier depositor confidence, resulting in part from the FDIC’s expanded guaran-tees, helped replenish some of the core deposit funding for financial institutions.

Fed Involvement in Bank Supervision

http://www.frbatlanta.org/pubs/annualreport/ar2009/banksupervision.cfm

20

Incooperationwithotheragencies,theFederalReserveisalsotougheningregu-lationstolimitexcessiverisk-takingandtohelpbankswithstandfinancialstress.Forexample,ontheinternationallevel,theFedhasworkedwithsuchorganizationsastheBaselCommitteeonBankSupervisiontoincreasethequantitiesofcapitalandliquiditythatbanksmusthold.Domestically,theFedisimplementingstandardsthatrequirebankingcompaniestoadoptcompensationpoliciesthatlinkpaytotheinstitutions’long-termperformanceandavoidencouragingexcessiverisktaking. AmultidisciplinaryapproachwillbeacentralfeatureoftheFed’ssupervision.TheFederalReserve’sabilitytodrawonarangeofdisciplines,usingeconomists,marketexperts,accountants,andlawyers,inadditiontobankexaminers,wasessentialtothesuccessofSCAP.TheFedhasbegunusingthisvariedexpertisetoaugmenttraditionalonsiteexaminationswithoffsitesurveillanceprograms.Inthesepro-grams,multidisciplinaryteamscombinesupervisoryinformation,firm-specificdataanalysis,andmarket-basedindicatorstoidentifyproblemsthatmayaffectoneormorebankinginstitutions. Perhapsmostimportantly,theFederalReserveistakingamore“macropruden-tial”approachtobanksupervision.DrawingfromtheFed’sexperiencesinconductingtheSCAP,thisindustry-wideapproachtranscendsthehealthofindividualinstitu-tionsandinsteadscrutinizestheinterrelationshipsamongfirmsandmarketstobetteranticipatesourcesofsystemicfinancialcontagion.

Do no harmTheFedandotherregulatoryagenciesarebeginningthenecessaryprocessofinternalchange.Yetthereisabalancetobestruck.Theymusttakecarenottostiflelendinganddamagetheeconomyastheystrengthenoversightofthefinancialsystem.Tothatend,inJanuary2010,theFederalReservejoinedtheotherfinancialregulatoryagenciesinissuingastatementreassuringbanks,businesspeople,andthepublicthattheagenciesareworkingwiththefinancialindustrytoensurethatsupervisorypoliciesandactionsdonotchokeoffcredittosoundsmallbusinessborrowers. Manypartiesmustcollaborateinstrengtheningourfinancialsystem.Financialinstitutions,regulators,andlawmakershaveimportantrolesinensuringthatlessonslearnedfromthecrisisthatbeganinlate2007areappliedintheserviceofthegreatergood.Howtheseinstitutionsandindividualsperformiscriticalnotjusttothosewhomakealivinginthefinancialindustrybutalsotothemajoritywhodependonfinan-cialservicesandthenation’slargereconomy. “Thecountryisjustnowemergingfromalongandpainfulrecessioncausedlargelybyacrisisinourfinancialsystem,”LockhartsaidinJanuary2010.“Weneedtofixthings,butpurportedreformsthatweakenhowthecountry’seconomicaffairsaregovernedwillbeharmfulandtoughtoundo.” TheSoutheast’sbankingindustryhasmadeprogressinescapingthedepthsofthecrisis.Asnoted,prospectsforlonger-term,sustainablerecoveryinthefinancialservicesindustryandthebroadereconomyweremixedattheendof2009.Yetthisregionboastsahistoricallydynamiceconomy.Alongwithabettercapitalized,man-aged,andsupervisedfinancialsector,thatdynamismshouldstandthepeopleoftheSoutheastingoodsteadinthecomingyears.

{Domestically, the Fed is implement-ing standards that require banking companies to adopt compensation poli-cies that link pay to the institutions’ long-term perfor-mance and avoid encouraging exces-sive risk taking.


21

International institutions face different pressuresDozensofoverseasbanksmaintainapresenceintheSoutheast.Attheendof2009,sixty-oneforeignbankingoperations(FBO)weredoingbusinessintheregion,includingtwenty-sixbranchesandagencies,elevenforeign-ownedbankholdingcom-panies,sixteenrepresentativeoffices,andeightEdgeActcorporations,whichholdspecialcharterstoconductinternationalbankingoperations. ThefinancialcrisisaffectedforeignbanksintheSoutheast,buttheimpactonthemwaslessdramaticthanitwasondomesticbanksbecauseofthesmallerscopeoftheirbusinessintheregion.Nonefailed,andveryfewwereinseveredistress.OnemajorreasonisthatheavylendinginU.S.realestatewasnotcentraltotheirbusi-nessplans.However,someFBOshaveincreasedtheirexposureasthey’veexpandedtheirgeneralbankingbusinessintheSoutheast.

Presence of international banking declines TheinternationalbankingpresenceintheSoutheasthasbeendecliningformorethanadecade.Inthe1980sandearly1990s,scoresofJapaneseandEuropeanbankshadoperationsintheSoutheast,mainlyinMiamiandAtlanta.Mostofthoseinstitutionshavesincepulledoutoftheregion. Morerecently,though,largeSpanishbankshaveexpandedherethroughacquisitionsandnewbranchoffices.ThesebankshavefoundappealingbuyingopportunitiesamongtroubledU.S.institutions.Acquirerscanoftenpickupthehealthyassetsandoperationsofproblembanksatafavorableprice.TheSpanishacquirersbecamemorecarefulasthecrisisspread.Theylearnedfromearlierdeals,inwhichthebankstheyboughthadmoreproblemsthanwereatfirstapparent.Theacquiringforeignbanksbecamemoreadeptattakingononlyhealthyassets,oftenthrougharrangementswithU.S.regulatoryagenciesthatseekbuyerstopreservetheworkingpartsofdistressedinstitutions. TheprimaryrisksfacingFBOsintheSoutheastdonotchangewitheconomiccurrents.ThoserisksinvolvecompliancewithBankSecrecyActprovisionsregardingmatterssuchasmoneylaundering.EnforcingFBOcompliancewithBankSecrecyActandanti-moneylaunderingregulationsisaprimarydutyoftheAtlantaFed’sMiami-basedsupervisorygroup.ThatworkisevolvinginresponsetothegrowthofcertainFBOs.Whenaforeigninstitution’scombinedU.S.assetsexceed$5billion,anewlevelofsupervisiontakeseffect.ThisinvolvescollaborationbetweentheAtlantaFed’sinternationalsupervisoryteamandthegroupthatsuperviseslargedomesticbankingorganizations.u

. . . this region boasts a historically dynamic economy. Along with a better capitalized, man-aged, and supervised financial sector, that dynamism should stand the people of the Southeast in good stead in the coming years.

22

2009 Milestones

Federal Reserve moves its paper check processing to one officeTheenactmentin2003oftheCheckClearingforthe21stCenturyAct,orCheck21,allowedthedigitalizationofchecks,makingcheckprocessingsignificantlyfasterandmoreefficient.BeforeCheck21,100percentofthechecksthattheFederalReserveSystemprocessedwerepaper.Today,almost99percentareprocessedaselectronicimages.TheAtlantaFedofficiallydiscontinuedpapercheckprocessinginearly2010butcontinuetoserveastheReserveBanks’locationforelectroniccheckprocessing.TheClevelandFedhandlespaperchecks.

Patrick K. Barron, the Atlanta Fed’s

first vice president and chief operat-

ing officer and the retail payments

product director for the Federal

Reserve System


23

Quarter 1• TheRetailPaymentsRiskForumintroduceditsPortalsandRailsblogand

hostedthefirstmeetingofitsadvisorycouncil,bringingtogetherdiversestake-holderstoadvanceactiontomitigateriskinthepaymentssystem.

• TheAmericasCenterandtheRetailPaymentsOfficesponsoredameetingwiththeCenterforLatinAmericanMonetaryStudiesandtencentralbankstodis-cussaframeworkforcross-borderpaymentexchangebetweentheUnitedStatesandLatinAmerica.

• AconsumerbankingconferenceinMiami,sponsoredbytheAtlantaFed,exploredtheimpactofaccesstobankingintheUnitedStatesandLatinAmerica.

• SupervisionandRegulation’s(S&R)RealEstateAnalyticsgrouphosteditsthirdannualFedSystemrealestatesummitondataandinformationinsupportofthefederalgovernment’sFinancialStabilityPlan.

Quarter 2• TheAtlantaFed’seconomicandfinancialeducationassessmentinitiative,con-

ductedinpartnershipwiththeSt.LouisFed,completedapilotstudyonteacher-focusedeconomiceducationandadultfinancialliteracyprograms.

• CashservicesfromtheAtlantaFedremainedatop-threeperformerintheFed-eralReserveSystem,providingthehighestlevelofproductionforcustomers.

• Thebank’sFinancialMarketsConferenceexaminedthechallengesofmeasur-ing,managing,andregulatingriskamidthedevelopmentofinnovativefinancialinstruments.

• S&RstaffhelpedconducttheSupervisoryCapitalAssessmentProgram—“stresstests”—ofthenation’snineteenlargestbankingcompanies,includingAtlanta-basedSunTrustBanksInc.andBirmingham-basedRegionsFinancialCorp.

• AspartoftheAtlantaFed’sFedGreenfive-yearplan,thebankhiredaninhouseenvironmentalcoordinatortoevaluatethebank’sexistinggreeninitiativesandpartnerwiththeGreenTeamtodevelopanenvironmentalplanthatalignswiththebank’sstrategicplan.

Quarter 3 • Aspartofthebank’sRegionalEconomicInformationNetwork(REIN),thefive

AtlantaFedregionalexecutivesareusingsector-specificadvisorycouncilstogathergrassrootsinformationontheeconomicperformanceofthosesectors.

• TheREINteamalsointroducedSouthPoint,aregionaleconomicsblog.• TheMiamiBranchopenedanewmonetarymuseumexhibitandvisitorcenter.• ThePolicyandSupervisoryStudiesgroupinSupervisionandRegulationhosted

theDebateandConfirmconferenceoncommercialrealestate(CRE)issues,focusingonprospectsforCREin2010.

• TheResearchDepartmenthostedaconferencethatexaminedhousing,labor,andtheeconomy,includingforeclosureratesandtherolethatraceandeduca-tionplayinneighborhoodformation.

The Miami branch opened a new monetary museum and visitor center.

24

Quarter 4• Thebank’snewCenterforFinancialInnovationandStabilitysponsoredacon-

ferenceonregulatingsystemicrisk,anespeciallytimelyissuein2009.• Thebank’scommunityandeconomicdevelopmentunit’sgrowingresearchin

communitydevelopmentandconsumerpolicypromptedtheunit’smovefromS&RtotheResearchDepartment.

• Thebank’sRetailPaymentsRiskForumhostedaconferenceonemergingriskstoelectronicretailpaymentssystemsandconsumerdata.

• MichaelJohnsonwasnamedseniorvicepresidentovertheSupervisionandRegulationDepartment.

• ThebankintroducedaredesignedpublicWebsite,frbatlanta.org,withimprovednavigationandamorerobustsearchengine.

• TheRealEstateAnalyticsteamlaunchedanewsectiononthebank’sWebsite.

Throughout the year: • ThreePublicAffairsforumsbroughtinternationallyknownexpertstoshare

economicperspectivesonpublicpolicyissues,includingtransportationandwaterpricingandconservation.

• Executivesandeconomistsdelivered370speechestonearly30,000peoplein69citiesacrosstheregion.AtlantaFedofficialsaimtokeepthepublicinformedaboutthestateoftheeconomyandtheFed’seffortstostabilizetheeconomyandfinancialsystem.

• FromtheAtlantaFed-basedRetailPaymentsOffice,costrecoveryforbothchecksandACH—automatedclearinghouse—systemwidewasbelowtarget,duelargelytobankingconsolidations,amongotherfactors.Butupcomingchangesininfrastructurewillimprovethecostrecoveryoutlook.

• TheresearchteamplannedanewdailyWebfeaturecalledtheInflationProjecttomonitorinflationonaglobalscaleandanewblogcalledtheRealEstateResearchBlogtoprovideananalysisofresearchandcommentaryontopicssuchasforeclosuremitigationandotherhousingandrealestateeconomicsissues.

The Atlanta Fed launched its redesigned Web site.


25

Sixth Federal Reserve District Directors

Federal Reserve Banks each have a board of nine directors. Directors provide eco-nomic information, have broad oversight responsibility for their bank’s operations, and, with Board of Governors approval, appoint the bank’s president and first vice president.

Six directors—three class A, representing the banking industry, and three class B—are elected by banks that are members of the Federal Reserve System. Three class C directors (including the chair and deputy chair) are appointed by the Board of Governors. Class B and C directors represent agriculture, commerce, industry, labor, and consumers in the district; they cannot be officers, directors, or employ-ees of a bank; class C directors cannot be bank stockholders.

Fed branch office boards have five or seven directors; the majority are appointed by head-office directors and the rest by the Board of Governors.

26

Atlanta Board of Directors{D. Scott DavisChair

Chairman and Chief Executive OfficerUnited Parcel ServiceAtlanta, Georgia

Carol B. ToméDeputy Chair

Chief Financial Officer and Executive Vice PresidentThe Home DepotAtlanta, Georgia

Thomas I. BarkinDirectorMcKinsey & CompanyAtlanta, Georgia

Teri G. FontenotPresident and Chief Executive OfficerWoman’s HospitalBaton Rouge, Louisiana

Renée Lewis GloverPresident and Chief Executive OfficerAtlanta Housing AuthorityAtlanta, Georgia

T. Anthony HumphriesPresident and Chief Executive OfficerNobleBank & Trust NAAnniston, Alabama

James H. McKillop III(resigneD)President and Chief Executive OfficerIndependent Bankers’ Bank of FloridaLake Mary, Florida

Rudy E. SchuppPresident and Chief Executive Officer1st United BankBoca Raton, Florida

Lee M. ThomasChairman, President, and Chief Executive OfficerRayonierJacksonville, Florida

James M. Wells IIIChairman and Chief Executive OfficerSunTrust Banks Inc.Atlanta, Georgia

FEDERAL ADVISORY COUNCIL MEMBER

Richard G. HicksonChairman and Chief Executive OfficerTrustmark CorporationJackson, Mississippi


27

Left to right: Humphries, Fontenot, Glover, Davis, Thomas, Tomé, Wells; not pictured: Barkin, McKillop, Schupp, Hickson

28

Birmingham Branch Directors{F. Michael ReillyChair

Chairman, President, and Chief Executive OfficerRandall-Reilly Publishing CompanyTuscaloosa, Alabama

Bobby A. BradleyManaging PartnerLewis Properties LLC and Anderson Investments LLCHuntsville, Alabama

Samuel F. DodsonConsultantInternational Union of Operating Engineers Local 312Birmingham, Alabama

Maryam B. HeadChairmanRam Tool and Supply Company Inc.Birmingham, Alabama

Macke B. MauldinPresidentBank IndependentSheffield, Alabama

C. Richard Moore Jr.Chairman, President, and Chief Executive OfficerPeoples Southern BankClanton, Alabama

Thomas R. StantonChairman and Chief Executive OfficerADTRAN Inc.Huntsville, Alabama


29

Left to right: Stanton, Bradley, Mauldin, Reilly, Dodson, Head, Moore

30

Jacksonville Branch Directors{Linda H. SherrerChair

President and Chief Executive OfficerPrudential Network RealtyJacksonville, Florida

Jack B. Healan Jr.PresidentAmelia Island CompanyAmelia Island, Florida

H. Britt Landrum Jr.President and Chief Executive OfficerLandrum Human Resource Companies Inc.Pensacola, Florida

Alan Rowe(resigneD)President and Chief Executive OfficerFirst Commercial Bank of FloridaOrlando, Florida

Wendell A. SebastianPresident and Chief Executive OfficerGTE Federal Credit UnionTampa, Florida

Ellen S. TitenPresidentE.T. ConsultantsWinter Park, Florida

Lynda L. WeathermanPresident and Chief Executive OfficerEconomic Development Commissionof Florida’s Space CoastRockledge, Florida


31

Left to right: Weatherman, Landrum, Titen, Sherrer; not pictured: Healan, Rowe, Sebastian

32

Miami Branch Directors{Gay Rebel ThompsonChair

President and Chief Executive OfficerCement Industries Inc.Fort Myers, Florida

Leonard L. Abess Chief Executive OfficerCity National Bank of FloridaMiami, Florida

Walter BanksPresidentLago Mar Resort and ClubFort Lauderdale, Florida

W. Cody Estes Sr.President and OwnerEstes Citrus Inc.Vero Beach, Florida

Dennis S. Hudson IIIChairman and Chief Executive OfficerSeacoast Banking Corporation of FloridaStuart, Florida

Eduardo J. PadrónPresident Miami Dade CollegeMiami, Florida

Thomas H. SheaChief Executive OfficerFlorida/Caribbean RegionRight ManagementFort Lauderdale, Florida


33

Left to right: Hudson, Abess, Padrón, Thompson, Banks, Shea; not pictured: Estes

34

Nashville Branch Directors{David Williams IIChair

Vice Chancellor and General CounselVanderbilt UniversityNashville, Tennessee

Rich FordPresident Hylant Group of NashvilleNashville, Tennessee

Daniel A. GaudetteRetired Senior Vice PresidentNorth American Manufacturing and Supply Chain ManagementNissan North America Inc.Smyrna, Tennessee

Cordia W. HarringtonPresident and Chief Executive Officer Tennessee Bun CompanyNashville, Tennessee

Dan W. HoganPresident and Chief Executive OfficerFifth Third Bank, TennesseeNashville, Tennessee

Debra K. LondonRetired President and Chief Executive OfficerMercy Health PartnersKnoxville, Tennessee

Paul G. WillsonChairman and Chief Executive OfficerCitizens National BankAthens, Tennessee


35

Left to right: Ford, Williams, Gaudette, London, Willson, Hogan; not pictured: Harrington

36

New Orleans Branch Directors{Robert S. BohChair

President and Chief Executive OfficerBoh Bros. Construction Company LLCNew Orleans, Louisiana

Gerard R. HostPresident and Chief Operating OfficerTrustmark National BankJackson, Mississippi

R. King MillingMember, Board of DirectorsWhitney Holding Corporation and Whitney National BankNew Orleans, Louisiana

Christel C. SlaughterPartnerSSA Consultants LLCBaton Rouge, Louisiana

Matthew G. Stuller Sr.Chairman and Chief Executive OfficerStuller Inc.Lafayette, Louisiana

José S. SuquetChairman, President, and Chief Executive Officer Pan-American Life Insurance GroupNew Orleans, Louisiana

Anthony J. TopaziPresident and Chief Executive OfficerMississippi PowerGulfport, Mississippi


37

Left to right: Host, Boh, Topazi, Slaughter, Stuller, Suquet, Milling

38

Sixth Federal Reserve District OfficersManagement Committee{

Dennis P. LockhartPresident and Chief Executive Officer

Patrick K. BarronFirst Vice President and Chief Operating Officer

David E. AltigSenior Vice President and Director of ResearchResearch Division

Christopher G. BrownSenior Vice President and Chief Financial OfficerCorporate Services Division

Anne M. DeBeerSenior Vice PresidentCorporate Services/Financial Services Division


39

Left to right: Oliver, Berthaume, Brown, Lockhart, Herr, Jones, Gooding, Barron, DeBeer; not pictured: Altig, Estes

William B. Estes III(retireD)Senior Vice PresidentSupervision and Regulation Division

Marie C. GoodingExecutive Vice President and Corporate Engagement Officer

Frederick R. HerrSenior Vice PresidentSystem Retail Payments Office

Richard R. OliverExecutive Vice PresidentSystem Retail Payments Office

Lois C. BerthaumeaDviser Senior Vice President and General AuditorAuditing Department

Richard A. JonesaDviser Senior Vice President and General CounselLegal Department

40

Other Officers{Scott H. DakeSenior Vice President

James M. McKeeSenior Vice President

Robert J. MussoSenior Vice President and Regional ExecutiveNew Orleans

Donald E. NelsonSenior Vice President

William J. TignanelliSenior Vice President

Andre T. AndersonVice President

John S. BraniginVice President

Michael F. BryanVice President

Suzanna J. CostelloVice President

Thomas J. CunninghamVice President and Associate Director of Research

Leah L. DavenportVice President

Juan del BustoVice President and Regional ExecutiveMiami

Brian D. EganVice President

J. Stephen FoleyVice President

Amy S. GoodmanVice PresidentNew Orleans

Cynthia C. GoodwinVice President

Lee C. JonesVice President and Regional Executive Nashville

Mary M. KeplerVice President

Robert A. LoveVice President

Mary M. MandelVice President

Bobbie H. McCrackinVice President and Public Affairs Officer


41

Christopher L. OakleyVice President and Regional ExecutiveJacksonville

Cynthia L. RascheVice President

John C. RobertsonVice President

Melinda J. RushingVice President

Juan C. SanchezVice President

Robert M. SchenckVice President

David E. TatumVice President

Adrienne M. Wells(retireD)Vice President

Julius G. WeymanVice President and Regional ExecutiveBirmingham

Christopher N. AlexanderAssistant Vice President

William B. BowlingAssistant Vice President

Joan H. BuchananAssistant Vice President and Corporate Secretary

Annella D. Campbell-DrakeAssistant Vice President

David J. Christerson(retireD)Assistant Vice President

Michael ChrisztAssistant Vice President

Chapelle D. DavisAssistant Vice President

Robert A. de Zayas(retireD)Assistant Vice PresidentMiami

Angela H. DirrAssistant Vice President and Assistant General Counsel

Gregory S. FullerAssistant Vice President

Paul W. GrahamAssistant Vice PresidentMiami

Todd H. GreeneAssistant Vice President

Robert D. HawkinsAssistant Vice President

Carolyn Ann HealyAssistant Vice President

Janet A. HerringAssistant Vice President

Kathryn G. HintonAssistant Vice President

Susan HoyAssistant Vice President and Assistant General Counsel

42

Amelia L. JohnsonAssistant Vice President

Bradley M. JoinerAssistant Vice President

Evette H. JonesAssistant Vice President

Jacquelyn H. LeeAssistant Vice President

Stephen A. LevyAssistant Vice President

Margaret Darlene MartinAssistant Vice President

Daniel A. MaslaneyAssistant Vice President

Marie E. McNallyAssistant Vice President

Elizabeth McQuerryAssistant Vice President

Annita T. MooreAssistant Vice PresidentNashville

D. Pierce NelsonAssistant Vice President and Public Information Officer

Doris QuirosAssistant Vice President and Assistant General Auditor

Susan L. Robertson(retireD)Assistant Vice President

Jeffrey F. SchieleAssistant Vice President

Adrienne L. SlackAssistant Vice President

David W. SmithAssistant Vice President

Maria SmithAssistant Vice President

Timothy R. SmithAssistant Vice President andCommunity Relations Officer

Phillip Mark SparksAssistant Vice President

Clifford S. StanfordAssistant Vice President

Allen D. StanleyAssistant Vice President

Jeff ThomasAssistant Vice President

Joel E. WarrenAssistant Vice PresidentJacksonville

Charles L. WeemsAssistant Vice President

Kenneth WilcoxAssistant Vice President

Christina M. WilsonAssistant Vice PresidentJacksonville

Stephen W. WiseAssistant Vice President

Auditing{In 2009, the Board of Governors engaged Deloitte & Touche LLP (D&T) for the audits of the individual and combined financial statements of the Reserve Banks. Fees for D&T’s services are estimated to be $9.6 million. Approximately $2 million of the estimated total fees were for the audits of the limited liability companies (LLCs) that are associated with Federal Reserve actions to address the financial crisis and are consolidated in the financial statements of the Federal Reserve Bank of New York.1 To ensure auditor independence, the Board of Governors requires that D&T be independent in all matters relating to the audit. Specifically, D&T may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of Reserve Banks, or in any other way impairing its audit independence. In 2009, the Bank did not engage D&T for any nonaudit services.

1 Each LLC will reimburse the Board of Governors for the fees related to the audit of its financial statements from the entity’s available net assets.

Atlanta Office

1000 Peachtree Street, N.E.

Atlanta, Georgia 30309-4470

Birmingham Branch

524 Liberty Parkway

Birmingham, Alabama 35242-7531

Jacksonville Branch

800 West Water Street

Jacksonville, Florida 32204-1616

Miami Branch

9100 N.W. 36th Street

Miami, Florida 33178-2425

Nashville Branch

301 Rosa L. Parks Avenue

Nashville, Tennessee 37203-4407

New Orleans Branch

525 St. Charles Avenue

New Orleans, Louisiana 70130-3480

CREDITS

The 2009 Federal Reserve Bank of Atlanta

Annual Report was created and produced

by the Public Affairs Department.

Vice President and Public Affairs Officer

Bobbie H. McCrackin

Assistant Vice President and

Public Information Officer

Pierce Nelson

Publications Director

Lynne Anservitz

Graphic Designer and

Art Director

Peter Hamilton

Writers

Charles Davidson

William Smith

Editors

Nancy Condon

Lynn Foley

Photographers

Flip Chalfant

Brad Newton

Printing

BennettGraphics

For additional copies contact

Public Affairs Department

Federal Reserve Bank of Atlanta

1000 Peachtree Street, N.E.

Atlanta, Georgia 30309-4470

404.498.8020

frbatlanta.org

Southeast Banking in the Financial Crisis...This expansion fueled demand for housing, retail...

Documents

Transcript of Southeast Banking in the Financial Crisis...This expansion fueled demand for housing, retail...