Banking Supervision and Banking Supervision and Regulation - - PowerPoint PPT Presentation

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

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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

My Background My Background

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Banking Supervision: Banking Supervision: Various Regulatory Agencies Various Regulatory Agencies

State chartered banks Nationally chartered banks Savings & Loans

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Federal Reserve System Federal Reserve System

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“ “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.)

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Monitor credit, market & operational risk; surveillance program; process applications; enforcement Conduct exams, direct supervision

SF Fed SF Fed -

• Banking Supervision Department

Banking Supervision Department

Banking Supervision

Support Services Supervision

Int’l & Large Bank Supervision Regional & Community Bank Supervision Budget, Communications, Policy Staff Development / Training Information & Resource Management Quality Assurance System Projects Wells Fargo Supervision Risk Monitoring & Analysis

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SF Fed’s “Risk Assessment Council” SF Fed’s “Risk Assessment Council”

An inside perspective on bank supervisors’ concerns

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280 4

50 100 150 200 250

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

Behind the Failures:

“Boom and bust” cycles & poor lending practices

• Agriculture lending
• Oil price collapse (’80s)
• Commercial real estate

& construction lending

• Subprime lending

Annual number of bank failures

One Reason for Bank Supervisors’ Concerns One Reason for Bank Supervisors’ Concerns

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Consumer Lending Construction / RE Lending Network & Information Security Weak Regional Economies *

Source: selected areas of concern identified by FRBSF Risk Assessment Council

Regulatory “Radar Screen” Regulatory “Radar Screen”

Interest Rate Risk Audit / Internal Controls / Fraud

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Real Estate / Real Estate / Construction Lending Construction Lending

Concentrations -

high and increasing...

Real Estate Markets

– will property values stay strong or bust?

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Consumer Lending Consumer Lending (includes residential & subprime)

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 bubbles Subprime loan risks

“He may not dress well, but he’s never missed a loan payment”

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11.99% 13.22%

250 450 650 850 1,050 1,250 1,450 1,650 1,850

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

8% 9% 10% 11% 12% 13% 14% 15%

Source: Federal Reserve Board; American Bankruptcy Inst.

Bankruptcy Filings

Debt service payments / disposable personal income Number of consumer filings in thousands

Consumer Lending Risks Consumer Lending Risks

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250 500 750 1,000 1,250 1,500 1,750 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04

Source: American Bankruptcy Institute

Number of consumer filings in thousands

Bankruptcy Filings Bankruptcy Filings

• II. Consumer Lending

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0.0 0.3 0.5 0.8 1.0 1.3 1.5 % of Total Loans

UT WA ID HI OR NV CA AZ

2002 2003 2004

Source: Bank Call Reports – Annual data are for the end of each year

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

(Past due 90+ days and Nonaccrual)

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Consumer: Residential Lending Concerns Consumer: Residential Lending Concerns

Causes for Concern:

Rapid growth of home lending, especially home equity lines

• Home equity loans “are a

time bomb” *

Potential regional RE market bubbles

* Source of quote: Analyst Richard X. Bove

• II. Consumer Lending

Total Residential Loans at 12th District Top Tier BHCs

42 61 93 172 194 205 22 30 40 56 84 105

50 100 150 200 250 300 350

2000 2001 2002 2003 2004 2005

1st Lien Home Equity + Jr Lien

$ Billions

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5-Year home price index change from June 2000 to 2005 (%)

Rapid home price appreciation in some Rapid home price appreciation in some metro areas metro areas – – sustainable? sustainable?

53% 61% 62% 67% 84% 87% 88% 96% 109% 115% 118% 121% 124% 0% 20% 40% 60% 80% 100% 120% 140%

Nation Tucson San Francisco Phoenix Honolulu Medford Oakland Las Vegas Ventura Los Angeles San Diego Sacramento Riverside

• II. Consumer Lending

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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

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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

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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%

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Consumer: Subprime Lending Risks Consumer: Subprime Lending Risks

12th District $108 Bill. Rest of nation $32 Bill.

SF Fed District’s Subprime Mortgage Lenders Account for 77% of Originations

• II. Consumer Lending

SF Fed District’s Subprime Mortgage Lenders Grew 3 Times Faster Than Nation

$0 $20 $40 $60 $80 $100 $120 1Q'04 1Q'05 12th District Rest of Nation

1Q 2005

$ Bill

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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

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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

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• V. Network & Information Security
• V. Network & Information Security

Recent Headlines:

“Third Party Security: Who Can You Trust?” “Hacker Hits up to 8MM Credit Cards” “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”

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Summary: Banking Areas of Concern Summary: Banking Areas of Concern

Information Security Consumer Protection The Federal Reserve Role Consumer Lending

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Financial Educational Financial Educational -

• Web Cites

Web Cites

www.frbsf.org/education/curriculum/index.html www.fdic.gov/consumers/consumer/moneysmart/index.html www.mymoney.gov www.thirteen.org/edonline/

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Credit Reporting Credit Reporting -

• Web Cites

Web Cites

www.Experian.com www.Transunion.com www.Equifax.com www.annualcreditreport.com

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Questions & Answers Questions & Answers