Banking Supervision and Banking Supervision and Regulation Regulation The Fed’s Role, New Products and Credit Protection November 2006 Karen Safley Federal Reserve Bank of San Francisco
My Background My Background � Manager, Administrative Services Group - Responsibilities include management of all examination support functions � Experience - Lending Officer/Branch Manager – 10 years - Federal Reserve Bank – 18 years • 12 years as a Consumer Compliance Examiner FRBSF • 6 years in training/examination support 2
Banking Supervision: Banking Supervision: Various Regulatory Agencies Various Regulatory Agencies State chartered banks Nationally chartered banks Savings & Loans 3
Federal Reserve System Federal Reserve System 4
“Fed” Banking Supervision Fed” Banking Supervision “ Mission � Promote the safety and soundness of the banking system and compliance with laws and regulations How? � Conduct examinations of financial institutions (safety & soundness, regulatory compliance) � Monitor performance and compliance off-site (early- identification of emerging risks) � Process applications (mergers, acquisitions, etc.) 5
SF Fed - - Banking Supervision Department Banking Supervision Department SF Fed Banking Supervision Support Services Supervision Budget, Communications, Int’l & Large Conduct Policy Bank Supervision exams, Staff Development / Regional & Community direct Training Bank Supervision supervision Information & Resource Wells Fargo Management Supervision Risk Monitoring & Quality Assurance Analysis Monitor credit, market & operational System Projects risk; surveillance program; process applications; enforcement 6
SF Fed’s “Risk Assessment Council” SF Fed’s “Risk Assessment Council” An inside perspective on bank supervisors’ concerns 7
One Reason for Bank Supervisors’ Concerns One Reason for Bank Supervisors’ Concerns Annual number of bank failures Behind the Failures: 280 “Boom and bust” cycles & 250 poor lending practices • Agriculture lending 200 • Oil price collapse (’80s) 150 • Commercial real estate & construction lending 100 • Subprime lending 50 4 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Source: FDIC; over 90% of FDIC insured institutions failed between 1980 and 1994 8
Regulatory “Radar Screen” Regulatory “Radar Screen” Construction / RE Lending Weak Consumer Regional Economies * Lending Network & Interest Information Rate Risk Audit / Security Internal Controls / Fraud Source: selected areas of concern identified 9 by FRBSF Risk Assessment Council
Real Estate / Real Estate / Construction Lending Construction Lending � Concentrations - high and increasing... � Real Estate Markets – will property values stay strong or bust? 10
Consumer Lending (includes residential & subprime) Consumer Lending Reason for Caution: � Weak economy • high unemployment • high bankruptcy rates • low consumer confidence � High consumer debt � Rapid growth of home loans (e.g. home equity lines) � Potential regional RE market “He may not dress well, but he’s bubbles never missed a loan payment” � Subprime loan risks 11
Consumer Lending Risks Consumer Lending Risks Debt service payments / Number of consumer disposable personal income filings in thousands 15% 1,850 13.22% 1,650 14% 1,450 13% 11.99% 1,250 12% 1,050 11% 850 10% 650 Bankruptcy Filings 9% 450 250 8% '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 Source : Federal Reserve Board; American Bankruptcy Inst. 12
II. Consumer Lending Bankruptcy Filings Bankruptcy Filings Number of consumer filings in thousands 1,750 1,500 1,250 1,000 750 500 250 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 Source : American Bankruptcy Institute 13
Bank Loan Quality Continues to Improve Bank Loan Quality Continues to Improve Utah banks have highest noncurrent loan rates, but levels improving rapidly Median Nonperforming Loan Rates 1.5 (Past due 90+ days and Nonaccrual) 1.3 % of Total Loans 2002 2003 2004 1.0 0.8 0.5 0.3 0.0 UT WA ID HI OR NV CA AZ Source : Bank Call Reports – Annual data are for the end of each year 14
II. Consumer Lending Consumer: Residential Lending Concerns Consumer: Residential Lending Concerns Total Residential Loans at Causes for Concern: 12th District Top Tier BHCs $ Billions � Rapid growth of home 350 300 lending, especially 105 250 84 home equity lines 200 56 150 • Home equity loans “are a 40 100 205 194 172 30 time bomb” * 50 22 93 61 42 0 � Potential regional RE 2000 2001 2002 2003 2004 2005 market bubbles 1st Lien Home Equity + Jr Lien * Source of quote: Analyst Richard X. Bove 15
II. Consumer Lending Rapid home price appreciation in some Rapid home price appreciation in some metro areas – – sustainable? sustainable? metro areas 5-Year home price index change from June 2000 to 2005 (%) 124% Riverside 121% Sacramento 118% San Diego 115% Los Angeles 109% Ventura 96% Las Vegas 88% Oakland 87% Medford 84% Honolulu 67% Phoenix 62% San Francisco 61% Tucson 53% Nation 0% 20% 40% 60% 80% 100% 120% 140% 16
Conventional Mortgage Loan Example: per $100,000 at 5% 10 year term 15 year term 30 year term � $1,056 $787 $534 Per Month $126,720 $141,660 $192,240 Full Term A good example for term comparison is a $500,000 loan at 5% � Compare how much you would pay over the life of the loan. 10 years = $1,267,200 15 years = $2,124,900 30 years = $5,767,200 17
Riskier Mortgage Lending Riskier Mortgage Lending Option Arm � Regular Payment Interest Only Less than Interest Owed Payment Power � Minimal Payments Skip Monthly Payments Negative Amortization Home Ownership Accelerator � Mortgage Married to Checking Account 18
Interest Only Single- Family- Mortgage Loans 2004 � San Diego 48% (1.2% in 2001) � Atlanta 46% � San Francisco 45% � Denver 43% � Oakland 43% � San Jose 41% 19
II. Consumer Lending Consumer: Subprime Lending Risks Consumer: Subprime Lending Risks SF Fed District’s Subprime SF Fed District’s Subprime Mortgage Lenders Grew 3 Mortgage Lenders Account Times Faster Than Nation for 77% of Originations $ Bill $120 12 th District $100 $108 Bill. $80 $60 Rest of nation $40 $32 Bill. $20 $0 1Q'04 1Q'05 1Q 2005 12th District Rest of Nation 20
Credit Card Debt Credit Card Debt The Average American Family owes over $7,000 in credit card debt � Monthly interest charges exceed $105 � Making Minimum payments will take 29 years to pay-off this debt � Making Minimum payments ($20) at 18% � - $18,400 will be paid in interest on the $7,000 debt 21
Consumer Protection Consumer Protection Issues: Predatory Lending � • Fair Lending • Unfair and Deceptive Acts and Practices Financial Privacy � • Identity theft • Fair and Accurate Credit Transactions (FACT) Act 22
V. Network & Information Security V. Network & Information Security Recent Headlines: “Hacker Hits up to 8MM Credit Cards” “Third Party Security: Who Can You Trust?” “Corporate Losses to Cybercrime Increasing” “46.9B is the amount of money lost annually by banks and other financial services providers due to the identity theft.” “Human Error is Greatest Security Risk” 23
Summary: Banking Areas of Concern Summary: Banking Areas of Concern The Federal Reserve Consumer Consumer Role Lending Protection Information Security 24
Financial Educational - - Web Cites Web Cites Financial Educational � www.frbsf.org/education/curriculum/index.html � www.fdic.gov/consumers/consumer/moneysmart/index.html � www.mymoney.gov � www.thirteen.org/edonline/ 25
Credit Reporting - - Web Cites Web Cites Credit Reporting � www.Experian.com � www.Transunion.com � www.Equifax.com � www.annualcreditreport.com 26
Questions & Answers Questions & Answers 27
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