Central Banker - Fall 2008

8/9/2019 Central Banker - Fall 2008

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Fall 2008

News and Views for Eighth District Bankers

By Michelle Neely

Earnings and asset quality at District banks andtheir national peers remained weak in the secondquarter, re ecting general economic malaise andcontinued deterioration in housing markets.

In the District, return on a erage assets(ROA) hit a 20-year low in the second quarter o 2008. ROA a eraged 0.81 percent—12 basispoints below its frst-quarter le el and 25 basispoints below its year-ago le el. Still, District

banks signifcantly outper ormed their U.S.peers (banks with a erage assets o less than$15 billion); the latter group posted an a er-age ROA o 0.61 percent in the second quar ter,compared with 0.81 percent in the frst quarter and 1.18 percent a year ago.

District banks’ a erage net interest margin(NIM) held steady at 3.79 percent, while itdeclined two basis points at peer banks.

D str ct Banks Face Tough T mes but Outperform U.S

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inside : 2 • Continuity and CommunityInteract at the St. Louis Fed

• Fed Establishes MortgageRules for All Lenders

3 • Recent BankFailures TeachLessons in MissedFundamentals

5 • What Can BeDone aboutthe WideningIncome Gap?

4 • RegionalRoundup

6 • Central Banker Online Looks atLiquidity

• Calendar

Fed Emergency Contact System

To Be Deployed n Arkansas

continued on Page 4

C lear and open communications are o tenimmediate casualties when a natural or man-made disaster hits an area. As a

community leader, you’d want your fnancialinstitution up and running again as quickly aspossible to help your area return to normal. Youmay not ha e the time or the people to addressthe in ormational needs o regulators.

The Federal Reser e wil l pro ide help throughan online tool that wil l initial ly be deployed toArkansas state-chartered banks later this year.The Fed and the Arkansas State Bank Departmentwill use the new Emergency CommunicationsSystem (ECS) to contact fnancial institutionsquickly and simultaneously during a crisis, gather basic in ormation rom institutions and pro idethem with in ormation on state and Fed regula-tory actions. Because the tool is designed to besel -ser ice, the institutions wil l determine whatkey personnel should be contacted.

The concept o an ECS grew rom discussionsbetween the Fed and Eighth District bank

commission-ers. “The toolis or crisisand con-tingency purposes only, and the in ormation wouldne er be used or marketing,” says the Fed’s JohnHussey, who is o erseeing the tool’s de elopment.“ECS could also be used or nonphysical disaster situations, such as in ormation on critical acti itieswithin the banking system or operational changesa ecting state and ederal banking regulators.”

The Arkansas State Bank Department andtwo Arkansas banks—Eagle Bank and Trust inLittle Rock and Cross County Bank in Wynne— participated in the ECS pilot program.

Future opportunities and partnerships are beingexplored with the remaining Eighth Districtstates (Missouri, Indiana, Mississippi, Tennessee,Kentucky and Illinois) and other Reser e banksand regulators so that state-chartered banks inthose states could use the system as well. n



Continuity and Community Interact at the St. Louis Fed By Jim Bullard, president and chie executive o fcer o the Federal Reserve Bank o St. Louis

W hen I settled into my new position asthe St. Louis Fed president in April, Iknew one o the frst things bankers

and others in the fnancial industry would want toknow was, what do I think and belie e? As we go

orward, I’ll be sharing those belie s through ari-ous enues.

Be ore becoming president in April, I was an

economist and deputy director o research or monetary analysis in the Research di ision.(See http://research.stlouis ed.org/econ/bullard/index.html or a list o my published work.) Iconducted economic analysis in the feld o macro-economics and monetary theory, and worked sideby side with ormer presidents Bill Poole and TomMelzer, helping them design policies and prepare

or the Federal Open Market Committee meet-ings. Like both Poole and Melzer, I am committedto preser ing the strong monetarist tradition or which the St. Louis Fed is known.

In the past se eral months, I ha e had the opportu-nity to share with the public some o my undamental

belie s about monetary policy through ariousspeeches I ha e deli ered. (Speeches are a ailable atwww.stlouis ed.org/news/speeches.html.)

An integral part o my role as president o theSt. Louis Fed is to meet with bankers, business lead-ers and community leaders, particularly rom our District, but also rom throughout the United Statesand the rest o the world. This interaction lets me

hear your thoughts and concerns about the local,national and international economy. This source o in ormation is highly aluable because your eedbackpro ides me with a picture o the economy—at boththe macroeconomic and microeconomic le els—thatI can use in my policymaking role. I accomplish thisthrough di erent economic, educational and com-munity e ents, such as board o directors meetings,economic orums and business luncheons.

I plan to isit all District branch cities in thecoming months; so, watch or in itations or isitwww.stlouis ed.org/news/con erences.html. I look

orward to meeting and hearing rom you in thecoming months and years. n

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Feditorial

The Federal Reser e Board laid out a newrule in mid-July to better protect consumers and

acilitate responsible lending.This rule is an amendment to the home mort-

gage pro isions o Regulation Z (Truth in Lend-ing). Anecdotal e idence gathered rom manysources has indicated that ew small and com-munity bankers in the Eighth District engaged insubprime loans. Howe er, as a banker or other lender, here’s what you need to know:

• The new mortgage rules apply to all lenders.

• Lenders must evaluate the borrower’s abilityto make scheduled payments; lenders mustalso eri y the borrower’s income and assets.

• Prepay penalties are banned in certainhigher-priced loan situations and restrictedin others.

• Consumers need to be given disclosuresearlier in the process.

• Lenders will be required to establish escrowaccounts or higher-than-a erage interestloans so that property taxes and insurancecosts will be included in regular monthlypayments.

Fed Chairman Ben Bernanke said in mid- July, “The new rules … will establish lendingstandards aimed at curbing abuses while pres-er ing responsible subprime lending and sus-tainable homeownership. … We belie e thenew rules will help to restore confdence inthe mortgage market.”

See the ull details at www. ederalreser e.go /newse ents/press/bcreg/regz20080714.htm. n

Fed Establ shes New Mortgage Rules for All Lend



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Bank Fa lures G ve Lessons n M ssedBy Allen North

The summertime collapse o IndyMacrepresented the second-largest U.S.bank ailure e er. IndyMac, a $32 bil-

lion ederal sa ings bank, based in Pasadena,Cali ., was the f th-largest mortgage lender inthe country. Locally, Arkansas experiencedits frst bank ailure in se en years when theComptroller o the Currencyclosed ANB Financial o Benton ille on May 9.

Both ailures werewidely publicized due to

the banks’ size and o erallbusiness strategies. Accord-ing to published reports,IndyMac su ered a liquiditycrisis caused by a deposit run.IndyMac was a large origina-tor o alt-A mortgages, whichwere o ten made to borrowerswith poor credit. As the sec-ondary market or these loanscollapsed, the bank’s liquidity

became strained.News reports asserted thatANB lacked the capital towithstand a high le el o non-per orming loans. ANB hadapproximately $1.9 bil-lion in total assets, roughly90 percent unded withbrokered deposits, which are more

olatile than core deposits. According to pub-lished reports, ANB’s past due and nonaccrualloans more than tr ipled during the six monthspreceding closure.

The FDIC estimates that the ailure o Indy-Mac will result in a material loss to the depositinsurance und o approximately $8 billion, whileANB’s ailure will amount to a $214 million lossto the und.

In light o these ailures, let’s look at issues thata ect a bank’s fnancial condition and what les-sons can be learned. The problems typically allinto one or more o the ollowing categories:

• Management forgets/ignores the principleo risk and return.

• Management fails to properly diversify.

• Bank personnel engage in activities thatthey do not ully understand.

• Management is incompetent, or a fraud is committed.

Banks can o ten achie e impressi e returns— which ar exceed peer le els—by employingaggressi e growth strategies, such as expand-ing into un amiliar markets, lowering o erallcredit quality or exposing the bank to high-riskcommercial real estate concentrations. O ten,

unding strategies in ol emore costly and less stablewholesale unding in the

orm o brokered deposits.The olatile combination

o aggressi e asset growthunded with wholesale sources

can create tremendous strainson liquidity and increase thebank’s sensiti ity to interestrate uctuations.

A better means o achie inggrowth is a measured approachwith an appropriate undingand risk management strategyestablished prior to any signif-cant growth.

Boards of directors shouldgive close attention to thetime-proven fundamentals of lending during good economictimes. Otherwise, issues willinevitably arise when credit

conditions deteriorate.Additionally, boards should

pay close attention to the lia-bility side o the bank’s balance

sheets. Brokered deposits, used within prudent

le els, can ser e as a legitimate source o und-ing. Howe er, i asset quality deteriorates andcapital ratios all, prompt correcti e actiontriggers can restrict the renewal o brokereddeposits. (For more, see “Prompt Correcti eAction: What Does It Mean or a Bank’s Liquid-ity?” in this issue’s online-only content atwww.stlouis ed.org/publications/cb.)

Boards o all banks should also consider contingent unding plans. Where appropri-ate, these plans should include completing the

required documents and pledging collateral or contingency access to the discount window.(See www. rbdiscountwindow.org or more.) n

Allen North is an assistant vice president in the St. LouisFed’s Banking Regulation and Super vision division.



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Tough T mescontinued rom Page 1

Proftability ratios at both sets o banks were broughtdown by small increases in net noninterest expenseand more substantial boosts in loan loss pro isions.

Loan loss pro isions as a percent o a erage assets(LLP ratio) rose nine basis points to 0.52 percent inthe District—almost triple the le el o a year ago.At national peer banks, the increase was more pro-nounced (to 0.71 percent).

Loan loss pro ision increases re ect, o course,asset quality problems that continue to mount in theDistrict and nation. The ratio o nonper ormingloans to total loans was 1.53 percent at District banksand 1.92 percent at U.S. peer banks at the end o thesecond quarter. The proportion o nonper ormingloans has nearly doubled at District banks and hasmore than doubled at peer banks o er the past year.

Problems in the real estate port olio are primarilyresponsible or the o erall increase: At the end o thesecond quarter, 1.77 percent o real estate loans werenonper orming at District banks. Within the realestate port olio, delinquency ratios were most pro-nounced in construction and land de elopment loans(4.25 percent) and multi amily loans (1.60 percent).Delinquency rates ha e risen in C&I and consumer port olios, too. The trends are identical at peer banks.

District banks remain on a erage well-capitalized.At the end o the second quarter, just one bank (outo 713) ailed to meet one o the three regulatorycapital ratios. District banks a eraged a le erageratio o 9.11 percent. n

Michelle Neely is an economist at the Federal Reserve Banko St. Louis.

Tougher T mes or D str ct Earn ngs and Loan Qual1

2nd Q 2007 1st Q 2008 2nd Q 2008

RETURN ON AvERAGE ASSETS2

District Banks 1.06% 0.93% 0.81%Peer Banks 1.18 0.81 0.61

NET iNTEREST MARGiN

District Banks 3.87 3.79 3.79Peer Banks 3.96 3.85 3.83

LOAN LOSS PROviSiON RATiO

District Banks 0.19 0.43 0.52Peer Banks 0.22 0.57 0.71

NONPERFORMiNG LOANS RATiO3

District Banks 0.89 1.714 1.53

Peer Banks 0.83 1.63 1.92SOURCE: Reports of Condition and Income for Insured Commercial Banks

1 Banks with assets of more than $15 billion have been excluded from the analy2 All earnings ratios are annualized and use year-to-date average assets or earning

the denominator.3 Nonperforming loans are those 90 days or more past due or in nonaccrual status.4 Excluding data of ANB Financial brings the 1st quarter NPL ratio down to 1.54 p

Foreclosure Forum Set or St. Lou sAs part o its Homeownership and

Mortgage Initiati e, the Federal Reser eis sponsoring a series o oreclosure

orums across the country, includingone in St. Louis. Called “Reco ery,Renewal, Rebuilding,” the series isdesigned to generate discussion onthe a tere ects o the oreclosure crisisamong business and community leaders,go ernment o fcials and policymakers.

The orums examine the currentstate o communities that are experi-encing signifcant oreclosures. Cre-ati e solutions or reco ering andpreparing or the uture are explored.National experts discuss the challengesthat oreclosures present and engageparticipants in fnding solutions.

The Homeownership and MortgageInitiati e is a comprehensi e FederalReser e strategy to pro ide in orma-tion to help pre ent unnecessary ore-closures and to stabilize communitiesa ected by the crisis.

The orum scheduled or St. Louis onSept. 24 and 25, called StrengtheningNeighborhoods in Weak Markets, isopen to all interested parties. See www.stlouis ed.org/RRRseries to register.

Banks Can O er NewForeclosure Sur al Gu de

Homeowners who areha ing di fculty makingtheir mortgage paymentscan get help ul in orma-tion rom The Foreclosure Survival Guide, new romthe Federal Reser eBank o St. Louis.

This brochure pro-ides basic in ormation

on who is at risk or oreclosure,where to fnd help and pit alls to a oidwhen seeking help. The ree publica-tion includes a national hot line number (1-888-995-HOPE) and a list o localcounseling agencies that homeownerscan call or ad ice.

Bankers who would like copieso the guide to distribute can callCynthia Da is o the St. Louis Fedat 314-444-8761 or e-mailcommunityde elopment@stls. rb.org.

Regional Roundup

T he F o r e c l o s u r e S ur v i v al Gui d e I t ’ s a nat i o nal c r i s i s : C o ul d y o u b e at r i s k o f l o s i ng y o ur ho me ?



• increased fractions of workers with advanced degrees.

These fndings generally support theories that the wage gapis widening because o changes in industrial structure, risinglow-skill labor supply and skill-biased technological change.

What Can Policymakers Do?

E idently, since much o the rise in inequality is asso-

ciated with the supply o and demand or workers withhigh le els o skills, inequality is probably best handledby increasing the raction o workers with high le elso education.

O course, while helping workers at the bottom end o the distribution acquire human capital would undoubtedlyhelp raise the lower end o the wage distribution, increasingthe total supply o highly skilled workers may exacerbateinequality, at least in the short run. An increase in thenumber o workers with ad anced degrees may create e engreater bias or the highly skilled and enhance their earn-ings—while lea ing behind those with lesser education.

O er time, howe er, as workers with high le els o schooling become the majority o the American labor

orce, the degree o homogeneity among workersincreases. In addition, the extent to which employers are

orced to bid or relati ely ew high-skill employees willdecrease, dampening growth at the top end o the earn-ings scale.

Policies aimed at in uencing skills are probably moredesirable than those attempting to a ect what types o

industries employ American workers, e.g., subsidizingcertain sectors, strengthening trade barriers. Indeed, thedecline o jobs in manu acturing represents the con uenceo orces well beyond the control o go ernment, orcessuch as the e olution o technology, the decline o trans-portation costs and the growing integration o marketsaround the world.

There ore, al ling wages and the problems associatedwith workers who ha e been displaced rom this sector are probably most e ecti ely addressed through programsthat pro ide workers with job skills that the Americaneconomy now demands, as discussed in the report. More-o er, by augmenting the human capital o all workers inthe United States, the ability o indi iduals to make thetransition rom one line o work to another is enhanced,with relati ely modest losses in earnings. n

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What Can Be Done about theW den ng income Gap?By Christopher H. Wheeler

Christopher H. Wheeler is a ormer Researcho fcer at the Federal Reserve Bank o St. Louis.

Access more o his research at http://research.stlouis ed.org/econ/wheeler/index.html.

Acommon mantra amongpoliticians is that the richare getting r icher while

the poor are getting poorer. Datapoint to a dramatic rise in incomeinequality in the United Statesbetween 1980 and 2006.

The fndings were publishedthis summer in Earnings Inequal-ity within the Urban United States:2000-2006, which examineshourly labor earnings or 298 U.S.metropolitan areas—including

St. Louis, Little Rock, Louis illeand Memphis. The ull report isa ailable at www.stlouis ed.org/community/assets/pd /Income_ Inequality_report.pd .

The data on the whole indicatethat there is an e er-wideningwage gap between those at the topend o the pay scale and workersat the low end. The rise in wageinequality has been dri en bysuch actors as educational attain-ment, e.g., high school ersuspost-baccalaureate degrees. Basedon an analysis o inequality, someo the most important correlateso rising inequality between 2000and 2006 were ound to be:

• decreasing manufacturing,

• rising fractions of foreign-

born workers (which are pos-sibly associated with increasednumbers o low-skill workers),

• rising rates of unemploymentand



P.O. Box 442St. Louis, Mo. 63166-0442

Editor Scott Kelly314-444-8593scott.b.kelly@stls. rb.org

Central Banker is published

quarterly by the Public A airsdepartment o the Federal Reserve Bank o St. Louis.Views expressed are not necessarily o fcial opinionso the Federal Reserve System or the Federal Reserve Bank o St. Louis.

FIRST-CLASSUS POSTAGE

PAiD

PERMIT NO 4ST LOUIS, MO

Central Banker Onl neLooks at L qu d ty

Check out this issue’s online-onlycontent at www.stlouis ed.org/cb,

including the ollowing:• The Fed’s Julie Stackhouse

looks at what prompt correc-ti e action means or a bank’sliquidity.

• A new Fed web site supportsminority-owned institutionsand de no o banks.

• The Fed’s Community Devel-opment Ad isory Council isready to ser e.

• Christopher Waller to becomeSt. Louis Fed’s director o Research.

• New rules are coming in 2009 or Fed ACH interna-tional transactions.

• Innovation Exploration continues in the EighthDistrict.

Local Bus ness Cyclesand Cr me RatesST. LOUIS—OCT. 29LITTLE ROCK—NOv. 20LOUISvILLE—DEC. 3MEMPHIS—DEC. 9

Fed economist Thomas A.Garrett will discuss his new studyon local business cycles andtheir e ect on crime rates. Thereport includes in ormation on

our urban areas in the Bank’sdistrict: St. Louis, Little Rock,Louis ille and Memphis. Register online at www.stlouis ed.org/

community or by contacting theFed’s Cynthia Da is in St. Louisat 314-444-8761, Julie Kerr inLittle Rock at 501-324-8296,Lisa Locke in Louis ille at502-568-9292 or Cathy Martin inMemphis at 901-579-4102.

Ch ld De elopment Accounts: AResearch and Pol cy Sympos umST. LOUIS—NOv. 12-14

Scholars rom around the

country will present papers onthe national potential o childde elopment accounts, a rapidlyemerging idea in the United

States. For in ormation, call or e-mail Washington Uni ersity’sGena Gunn at 314-935-9651 or

[email protected].

Econom cs o Ethanol:Costs, Benefts and FutureProspects o B o uelsST. LOUIS—NOv. 14

Members o fnancial institu-tions and other business leadersare among those in ited to a non-technical con erence on the eco-nomics o ethanol. Session topicsinclude the proftability o ethanol

processing, the impact o ethanolsubsidies on rural economies, andthe e ects on ood prices and

arm production decisions. TheSt. Louis Fed’s Research di isionis among the hosts or the con er-ence, which will be held at Wash-ington Uni ersity in St. Louis.For more in ormation, seehttp://research.stlouis ed.org/con erences/ethanol/index.html,or e-mail the Fed’s Tom Garrett

at tom.a.garrett@stls. rb.org or Washington Uni ersity’s MelindaWarren at [email protected].

Calendar Eventsupcoming fed-sponsored events

for eighth district

depository institutions

Central Banker - Fall 2008

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