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FALL 2009



F E AT U R E D I N T H I S I S S U E : Why Are Banks Failing? | Spotlight on Evansville (Ind.) Banks

Congress Considering 15
Regulatory Reform Proposals
Track Financial Reform with New St. Louis Fed Web Site
By Jim Fuchs


f ultimately signed into law, the regulatory reform proposals presented
to Congress this summer could significantly alter how financial institutions
in the United States are regulated and,
in some cases, structured.
Since releasing its regulatory reform
white paper June 17, the Treasury
Department has submitted more than
15 legislative proposals to Congress.
In turn, Congress has held more than
22 hearings, formally introduced two
of the bills to a key oversight committee and conducted a full House of
Representatives vote on one of them,
all in less than six weeks.
The St. Louis Fed created the
Reforming the Nation’s Financial
System Timeline web site ( to track the
proposals, congressional and regulatory agency hearings and testimony,
and committee members’ statements.
The most significant proposals as
of late August include:
• creation of an eight-member Financial Services Oversight Council to
identify and mitigate threats to
the financial system;
• elimination of the federal thrift
charter and creation of one single
national bank supervisor;

• creation of an independent Consumer Financial Protection Agency
to oversee and enforce consumer
protection laws and regulations at
all financial institutions (except for
the enforcement of the Community
Reinvestment Act);

jean-manuel duvivier/

• mandatory registration of all credit
rating agencies with the Securities
and Exchange Commission;
• creation of an Office of National
Insurance to issue and collect
reports on the insurance industry;
• establishment of uniform de novo
branching standards, regardless
of charter;
• conversion of industrial loan
companies, credit card banks and
thrift holding companies to bank
holding companies;
continued on Page 7

T H E F E D E R A L R E S E R V E B A N K O F S T. L O U I S : C E N T R A L T O A M E R I C A’ S E C O N O M Y ™

News and Views for Eighth District Bankers

Vol. 19 | No. 3

St. Louis Fed Stationing
Examiners in Little Rock


Scott Kelly
Central Banker is published quarterly by the
Public Affairs department of the Federal
Reserve Bank of St. Louis. Views expressed
are not necessarily official opinions of the
Federal Reserve System or the Federal
Reserve Bank of St. Louis.
To subscribe for free to Central Banker or
any St. Louis Fed publication, go online to
To subscribe by mail, send your name, address,
city, state and ZIP code to: Central Banker,
P.O. Box 442, St. Louis, MO 63166-0442.
The Eighth Federal Reserve District includes
all of Arkansas, eastern Missouri, southern
Illinois and Indiana, western Kentucky and
Tennessee, and northern Mississippi. The
Eighth District offices are in Little Rock,
Louisville, Memphis and St. Louis.

By Julie Stackhouse


uring these challenging times,
bankers want answers quickly.
And sometimes, there is no substitute
for a face-to-face meeting.
State member banks in Arkansas will
now find this quick in-person access
even easier with the opening of the
St. Louis Fed satellite supervision office
in Little Rock. The office, staffed with
10 examiners, mirrors an initiative
undertaken four years ago, when the
St. Louis Fed established a satellite
office in Memphis. Bankers in Memphis
told us that the local presence enhanced
overall communication and supported
an effective supervisory process.
Among the many benefits we have seen:

Julie Stackhouse is
senior vice president
of the St. Louis Fed’s
division of Banking
Supervision, Credit
and the Center for
Online Learning.

• greater accessibility and quicker response time;
• more efficient opportunities to conduct advisory visits
on matters of special interest, such as the Bank Secrecy
Act and risk management practices; and
• streamlining of collaboration with the state banking
authorities, thereby promoting more consistency
and higher quality in our examinations and other
supervisory processes.
At the same time, we will continue our other communication efforts, including the monthly “Ask the Fed” program
and periodic informational forums for bankers. In these
challenging times, it is more important than ever that the
St. Louis Fed provide you with the information and answers
you need.
For further information on the supervisory duties of
the St. Louis Fed, please see

2 | Central Banker


Banks Still Ailing in District and U.S.
By Michelle Neely


lthough the U.S. economy has
recently shown a few signs of life,
the nation’s banking industry is still
being battered by weak earnings and
increasing problems with asset quality.
Aggregate profits at District banks
surprisingly rose in the second quarter,
albeit by a modest amount. Return on
average assets (ROA) increased four
basis points to 0.22 percent. For U.S.
peer banks (banks with average assets
of less than $15 billion), the news was
not even remotely good: ROA declined
another 21 basis points to -0.30 percent.
For both District and U.S. peer banks,
the weakest performers were banks in
the $1 billion to $15 billion asset range;
excluding them, ROA was 0.65 percent
at District banks and 0.15 percent at
U.S. peers.
The profitability improvement at
District banks was driven by a slight
uptick in the net interest margin
(NIM), which increased three basis
points to 3.66 percent. Net noninterest expense also declined, which
more than offset the modest increase
in loan loss provisions. The average
NIM at U.S. peer banks also rose, but
that increase was dwarfed by a large
increase in the loan loss provision
ratio and a moderate increase in the
net noninterest expense ratio.
Loan loss provisions as a percent
of average assets increased three
basis points to 0.93 percent at District
banks in the second quarter. For
U.S. peer banks, the hike was more
substantial, as the LLP ratio rose
18 basis points to 1.49 percent. Despite
the additions to reserves, the coverage
ratio fell again at both sets of banks.
At the end of the second quarter,
District banks had 70 cents reserved
for every dollar of nonperforming
loans, down 4 cents from the prior
quarter and 20 cents from a year ago.
At U.S. peer banks, the coverage
ratio declined 3 cents from the first
quarter and stood 22 cents below
its year-ago level.

As indicated by the increasing loan
loss provisions and declining cover
ratios, asset quality continues to worsen
at both sets of banks. Nonperforming
loans as a percentage of total loans hit
2.44 percent at District banks in the
second quarter, up 25 basis points from
the first quarter and 91 basis points
from a year ago. For U.S. peer banks,
the picture is bleaker, as 3.77 percent
of loans were nonperforming at the
end of the second quarter, up 46 basis
points from the first quarter and
185 basis points from the second quarter of 2008. All major categories of
loans (commercial, consumer and real
estate) had higher delinquencies in the
second quarter at both sets of banks.
Commercial real estate (CRE) lending continues to be the area of greatest
concern. CRE loans make up almost
half of total loans at District and U.S.
peer banks. Therefore, problems in
this sector have a major effect on overall
results. Within CRE, construction and
land development (CLD) loans are
the most troubled. In the District,
7.35 percent of CLD loans were
continued on Page 7

When Will Woes Be Gone?
Q2 2008

Q1 2009

Q2 2009







District Banks




Peer Banks




District Banks




Peer Banks





District Banks
Peer Banks



District Banks




Peer Banks




SOURCE: Reports of Condition and Income for Insured Commercial Banks
Banks with assets of more than $15 billion have been excluded from the analysis. All earnings
ratios are annualized and use year-to-date average assets or average earning assets in the
denominator. Nonperforming loans are those 90 days or more past due or in nonaccrual status.
Central Banker Fall 2009 | 3


Why Are Banks Failing?
By Jim Fuchs and Tim Bosch


ank closings are now front-page
news in many small communities,
with 81 occurring so far this year
(as of Aug. 21). Even small towns like
Winchester, Ill. (population: 1,650),
have experienced the transition of
a failed bank to new ownership.
Although today’s challenges are
great, the four underlying reasons for
bank failures have not changed from
those of years’ past, which are:
• an imbalance of risk versus return,
• failure to diversify,
• offering products and services
that management doesn’t fully
understand, and
• poor management of risks.

Number of Failed and Assisted Banks and Thrifts



















Source: FDIC website

One: Imbalance of Risk versus Return
The imbalance of risk versus return
can best be illustrated through example.
In 2008, ANB Financial N.A., Rogers,
Arkansas, failed. (See
oig09013.pdf.) Public data shows that in
less than a two-year period, ANB went
from being a mid-sized community
bank with $600 million in total assets
to a $2.2 billion institution. The bank’s
balance sheet showed that most of the
4 | Central Banker

growth into the risky construction and
land development (CLD) loan segment
was funded through brokered deposits.
On the surface, ANB’s loan pricing of
the construction and land development
loans appeared favorable. Loans were
often priced 300 basis points above
typical real estate rates. While 300
basis points seemed opportunistic at
the time, the rate charged was insufficient for the risk being assumed. A
substantially higher premium, perhaps
an unimaginable risk premium, would
have been necessary to compensate for
the lower quality asset.
ANB is an extreme situation. Nonetheless, during strong economic times,
the pricing of balance sheet assets is
frequently misaligned with the inherent risk acceptance in lending. The
result is felt when economic tides turn
and losses are experienced.

Two: Failure To Diversify
Failure to diversify can occur on
both the asset and liability side of the
balance sheet. Any concentration of
assets by loan category, industry or
geography creates the potential for
material losses when stress events
occur. Choosing not to diversify intensifies the need for higher capital ratios.
Diversification needs to occur on the
liability side of the balance sheet as
well. More than 85 percent of ANB’s
funding came from brokered deposits.
Brokered deposits, while relatively
inexpensive, created huge liquidity
consequences when the bank’s financial condition deteriorated. Prompt
corrective action guidelines restricted
the renewal of brokered deposits and
limited the rates that could be paid
on all deposits. In short, ANB experienced an old problem: Liquidity is
unavailable when it is needed most.

Three: Failure To Understand Products
and Services
A major contributor to today’s
financial crisis was the failure to
fully understand the products in
the financial marketplace and their


Key Your Bank into “Green” Finance
Sept. 22
counterparty risks. Even community
banks purchased structured products,
such as mortgage-backed securities,
presumably designed to lessen balance sheet risk. Banks purchasing the
product frequently did not fully understand the composition and risks of the
underlying assets, and instead relied
on rating agencies or product brokers
for the analysis.

Four: Poor (or No) Risk Management
Risk management can be a difficult
topic for community bankers who
often don’t have sophisticated systems
in place. In some respects, though,
good risk management is simply good
management. Good management
involves a culture of understanding
risks in the institution’s operations
and how those risks change as product
structures evolve, business operations
transform, or economic conditions
cycle. Good management involves an
environment of strong internal controls and high ethical standards on the
part of every employee. Good management requires an effort to properly
align incentives with performance
and to develop appropriate checks and
balances through internal audit and
board of directors’ oversight.
As bank failures are reported over
the next few years, each will have its
story. Inevitably, the story will reflect
one of the themes discussed in this
article. Banks that avoid the risk factors will emerge as the survivors in an
industry that will end up stronger.

>> O N LY O N L I N E

Listen as Tim Bosch discusses
how banks can avoid failure at
Tim Bosch is a vice president over safety and
soundness examinations and Jim Fuchs is a
supervisory policy analysis manager in the
Banking Supervision and Regulation division
at the Federal Reserve Bank of St. Louis.

Financial institutions interested in exploring “green” financial
products, projects and municipal developments can attend Green
Finance: Investing in Sustainable, Energy-Efficient Developments
from 10 a.m. to 4 p.m. Sept. 22 at the Hyatt Regency in Louisville.
This event will demonstrate how federal, state and local policies,
along with new financial products, are providing opportunities
for investment in environmentally friendly and sustainable communities. Bankers can learn how investors are considering the
financial returns on investments in green projects and the social
and environmental returns. Contact the Fed’s Emily Lape at
502-568-9282 or to register.

St. Louis Fed’s Web Site Revamped
The St. Louis Fed’s web site
( has been
revamped and now offers several
new features and tools. These
features include customizable
economic charts and data,
including data from the Fed’s
Little Rock, Louisville and
Memphis zones; multimedia features; RSS feeds; an
expanded menu of e-mail alert
reports; and a new job search tool.
You can find brief videos of St. Louis Fed President James Bullard
exploring such topics as exit strategies for the Fed and origins of
the crisis, and audiocasts from Fed economists discussing the
latest economic data.

Hey, Whatever Happened to That Bank?
Have you ever wondered what happened to a particular bank
in the Eighth District? Did it go out of business, change its name
or, more likely, merge with another institution? Find out with
a handy St. Louis Fed web page that depicts the merger and
name change histories of select institutions. The information
is presented state by state.

>> G O O N LI N E

Central Banker Fall 2009 | 5

Spotlight on Evansville
Metro Bank Performance

Data suggest a link between CRE lending and weak bank performance.
By Gary S. Corner and
Rajeev R. Bhaskar


vansville, tucked away in the
southwest tip of Indiana, is the
commercial, medical and service
hub of the Illinois-Indiana-Kentucky
tristate region. The Evansville
metropolitan statistical area (MSA) is
the 142nd largest in the United States
and consists of four Indiana and two
Kentucky counties.

A Comparison of Evansville Banks with the Other
Eighth District Metropolitan Area Banks, Q1 2009
Evansville (metro) Peer Group Average
Number of Banks
Total Assets
Return on Assets
Nonperforming Loans/ Total Loans
Loan Loss Reserves/ Non Performing Loans
Tier 1 Leverage Ratio
CRE to Total Loans



$12,804 million

$65,409 million











SOURCES: Call Reports and CensusBureau. Numbers in red indicate unfavorable differences
when compared with the averages of other metropolitan areas’ banks.

Its strategic location on the Ohio
River and close proximity to a number of large MSAs has helped build
a broad economic base in the region
known for stability and diversity.
Major industries include manufacturing, warehousing and distribution,
health care, education and financial
services. Evansville is home to two
universities, the University of Southern Indiana and Evansville University, which together enroll more than
13,000 students and add stability to
the employment base.
Although much attention has been
paid to economic issues in other areas
of Indiana, such as Elkhart (unemployment rate of 17.5 percent), the
downturn has affected Evansville,
though to a lesser extent. The unemployment rate in the Evansville MSA
is 8.7 percent (May) compared with
6 | Central Banker

10.6 percent in Indiana and 9.4 percent
for the nation (as of August). Although
Evansville does not appear to be experiencing any unique economic shocks,
such as large factory closings or losses of
company headquarters, it has not been
immune to declining real estate values
and elevated home foreclosures either.

Banking Analysis
The banking market of the Evansville MSA is made up of 12 locally
headquartered banks, 16 banks headquartered outside of Evansville but
with a presence in the MSA, and three
thrifts. These institutions offer 146
branches in total. A measure of market competitiveness called the Herfindahl-Hirschman Index (HHI) indicates
a moderate level of competition for the
Evansville market.
Analysis of the aggregate performance of the 12 Evansville-headquartered banks appears to imply relative
weakness for the overall market. The
asset-weighted return on average
assets (ROA) at Evansville banks averaged -0.33 percent in the first quarter,
compared with 0.30 percent for peers.
Aggregate numbers for asset quality,
nonperforming loans and coverage
ratio also indicate a weaker banking
market compared with the peer markets in the Eighth District.
A look at individual bank performance within the Evansville market,
however, reveals that 10 out of 12
banks are actually profitable, and unweighted average ROA is 0.42 percent.
Furthermore, all banks have a positive earnings run rate, which means
that their net interest income and fee
revenue earned more than what covers
their operating expenses.
In addition, significant losses at
one institution appear to drag down
the average profitability of the entire
market. The institution with significant
losses has a much higher concentration
in commercial real estate (CRE) loans
(42 percent of all loans) compared with
the other Evansville banks. It also has

the highest percent of nonperforming loans (7.8 percent), most of which
are in the CRE portfolio. Most other
banks in Evansville are performing
well and have limited CRE exposure, so
there does appear to be an association
between CRE exposure and bank performance. CRE portfolios at U.S. banks
have witnessed higher loss rates in
recent times than most other loan types.
In conclusion, economically the
Evansville MSA has fared at par with
its peer group in this economic downturn. Aggregate bank performance, at
first glance, appears relatively weaker.
But most banks in the MSA are actu-

ally performing well, with 10 out of
12 being profitable. Significant losses
and weak performance at one bank
have pushed the market’s average performance metrics below peer markets.
A closer examination of the individual
bank performance seems to suggest an
association between high CRE exposure and weak performance.

Regulatory Reform Proposals

Quarterly Report

continued from Page 1

continued from Page 3

• granting new authority for the Fed
to supervise all firms, regardless
of structure or charter, that pose a
threat to financial stability; and

nonperforming at the end of the
second quarter. For U.S. peer banks,
the ratio topped 13 percent. Poor CLD
loan performance is spread among
banks of all sizes. District banks with
assets of less than $1 billion had a
6.46 percent nonperforming ratio.
This tough environment has not
had a substantial effect on regulatory capital thus far. At the end of the
second quarter, just six banks (out of
689) failed to meet at least one of the
regulatory minimums. District banks
averaged a Tier 1 leverage ratio of
8.94 percent, well above the 4 percent
minimum for that ratio.

• creation of a new resolution regime
for financial institutions deemed
systemically important (identified as
Tier 1 financial holding companies).
The consumer agency proposal
would require nationally chartered
banks to comply with state consumer
protection laws and regulations if
the state requirements would offer a
higher level of consumer protection
than those of the new agency.
Before Congress’ August recess,
only two pieces of legislation had been
formally introduced into the House
Financial Services Committee: the
consumer agency proposal and a bill
on executive compensation, which
would give shareholders of publicly
traded companies a greater say on
executive pay. The House passed
the compensation bill July 31.

Gary Corner is a senior examiner and Rajeev
Bhaskar is a senior research associate of the
Banking Supervision and Regulation division
at the Federal Reserve Bank of St. Louis.
Intern Connie He provided data support.

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

Jim Fuchs is supervisory manager in the
St. Louis Fed’s Banking Supervision and
Regulation division.

Central Banker Fall 2009 | 7

P.O. Box 442
St. Louis, MO 63166

Central Banker Connected
F O R M O R E I N - D E P T H F E AT U R E S, F E D N E W S A N D



• What are the actual
commitments of Federal
Reserve lending?

• Significant changes
proposed for Regulation
Z (Truth in Lending)

• A look at commercial
bank lending during
the crisis

• Interim rules effective for
certain types of modified
mortgage loans

• As in the past, reform
will follow crisis

• Accurate consumer
report rules effective in
July 2010


• Rapid Response keeps
examiners up to date
• Is your bank physically

>> O N LY O N L I N E

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Banker, we’re now offering e-mail notifications
to all subscribers.
If you sign up, we’ll send you an e-mail
when the latest issue is published (four times
a year) and when critical information is made
available between issues. For example, we
may send you a message when an important
regulatory or policy message is coming from
our Bank president or our Banking Supervision and Regulation division. The frequency
of the between-issue messages will not be
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If you’re interested, please go to http://
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Please note that we respect your time and
privacy and will use your e-mail address for
this purpose only.

C E N T R A L B A N K E R | FA L L 2 0 0 9

Views: Clarifying the Roles and the Spending: The
Separate Functions of the Fed, Treasury and FDIC
Yadav K. Gopalan , Julie L. Stackhouse
As banks and consumers struggle with the current effects of the recession, events of last fall remain blurred in
the eyes of many. The public has struggled to distinguish between the actions of the Federal Reserve as a
central bank, the U.S. Treasury as a fiscal authority and the Federal Deposit Insurance Corp. (FDIC) as an
insurer of certain bank deposits.
Indeed, the extraordinary risk in financial markets required extensive coordination among the Federal Reserve,
the U.S. Treasury and the FDIC, while each continued to operate in a manner that was consistent with its
congressional mandate.
One way to differentiate the Fed's role is to recall the mission of the Federal Reserve. Congress formed the
Federal Reserve in 1913 to provide the nation with a safer, more flexible and stable monetary and financial
system. Maintaining the stability of the financial system and containing systemic risk were a key responsibility
for the Federal Reserve during last fall's crisis.

The Fed's actions
The Federal Reserve carried out its responsibilities in a number of ways last fall. First, it implemented
numerous lending programs under the "unusual and exigent circumstances" provision of Section 13(3) of the
Federal Reserve Act. These lending programs resulted in many new acronyms, including AMLF, CPFF, TSLF,
PDCF, MMIFF and TALF. (See the table for full names and details of Federal Reserve programs.) In addition,
the Fed initiated a number of currency swap lines with foreign central banks to provide U.S. dollar liquidity.
Finally, following the March 18, 2009, meeting of the Federal Open Market Committee, the Federal Reserve
announced that it would purchase up to $1.25 trillion in government agency mortgage-backed securities, $200
billion in agency debt and up to $300 billion in longer-term Treasury securities.

The Treasury's actions
The U.S. Treasury, on the other hand, used its fiscal authority to intervene in the economy. Two programs are
notable from the Treasury and the federal government: The Troubled Asset Relief Program (TARP), which
made roughly $700 billion available to certain financial institutions, and the federal government's economic
stimulus package, which totaled $787 billion. The Treasury was also instrumental in taking the beleaguered
government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac into conservatorship. In addition, the
Treasury extended temporary insurance coverage to money market mutual funds.

The FDIC's actions

About the same time, the FDIC expanded general deposit insurance coverage to $250,000 per depositor. It
also implemented two special term liquidity programs: The Temporary Liquidity Guarantee Program (TLGP)
and the Legacy Loans Program (LLP).

Not all announced funding has been spent
Many people have been confused as to how much money the agencies actually extended under both the old
and new programs. Some of the public assumed that all of the funds made available for certain programs
would be deployed; these people concluded that the Federal Reserve and Treasury had provided support in
the range of $15 trillion to $17 trillion dollars. Others asked where the off-balance sheet liabilities were
However, there is a significant difference between the announced funding limits for the programs and the
amount that was actually used.
For example, by adding the upper spending limits of the Fed's programs as announced in press releases, the
total amount comes to approximately $4.4 trillion. Yet, the amount actually extended under these programs
has been dramatically lower in several cases. (See table.) Moreover, programs such as the Commercial
Paper Funding Facility, the Term Auction Facility and the central bank liquidity swaps have decreased in
amount outstanding as financial markets have recovered from their very distressed levels of last fall.
Although many have been confused, the roles of the Federal Reserve, the U.S. Treasury and the FDIC, while
very different, have complemented one another during the financial crisis. The Federal Reserve has acted
strongly to provide stability to avoid a collapse of shaken financial markets. The Treasury has provided funding
to begin the recovery. And the FDIC has stabilized the key funding sources for banks.
For more information on the Fed's balance sheet, see the Board of Governors' Credit and Liquidity Programs
and the Balance Sheet web page.

Announced Program Limit
(if any)

Federal Reserve Programs

as of

Primary, secondary and seasonal credit


$35 billion

Term Auction Facility (TAF)
TAF program limit depends upon the maximum
that would be outstanding if all non-matured
auctions were fully subscribed (originally $900

$725 billion

$273.7 billion

Collateralized funding provided to Bear Stearns
under Section 13(3) of the Federal Reserve Act

$30 billion

$25.9 billion

Collateralized funding provided to AIG
$125 billion
(aggregate) under Section 13(3) of the Federal
Reserve Act
(Includes initial $85 billion loan + Maiden Lane II +
Maiden Lane III)

$78 billion

Asset-Backed Commercial Paper Money Market
Mutual Fund Lending Facility (AMLF) under
Section 13(3) of the Federal Reserve Act


$12.6 billion

Money Market Investor Funding Facility (MMIF)
under Section 13(3) of the Federal Reserve Act

$540 billion


Term Asset-Backed Securities Loan Facility
(TALF) under Section 13(3) of the Federal
Reserve Act

$1,000 billion

$24.9 billion

Term Securities Loan Facility (TSLF) under
Section 13(3) of the Federal Reserve Act

$75 billion

$4.3 billion

Primary Dealer Credit Facility (PDCF) under
Section 13(3) of the Federal Reserve Act



Central bank swap arrangements under Section
14 of the Federal Reserve Act

Swap line limits vary, depending on
specific agreements between the
Federal Reserve and the particular
central bank

$109.4 billion

Repurchase agreements (and reverse repurchase NA

$0 ($70.2

Purchase of government agency mortgage
backed securities and debt

$1,450 billion

$560.2 billion

Purchase of longer term U.S. Treasuries

$300 billion

$200 billion

SOURCE: Federal Reserve H.4.1 Statistical Release, Factors Affecting Reserve Balances, at

C E N T R A L B A N K E R | FA L L 2 0 0 9

Views: Ask the Fed® News Supplements Now
Available for Senior Bank Officers
If you're a participant in the monthly Ask the Fed conference call program, you now have access to additional
information between each call. The new "Ask the Fed(itorial)" news supplements will feature post-conference
call updates provided by Julie Stackhouse, senior vice president of Banking Supervision. The update topics,
posted on the Ask the Fed web page, will address events in the news of interest to bankers and provide a
regulatory perspective.
For those not familiar with the monthly program, Ask the Fed is a call-in session for senior officers of state
member banks and bank holding companies. St. Louis Fed economists and examiners—and an occasional
outside guest—give critical insights to senior officers on regulatory matters, the financial markets and financial
Both Ask the Fed and the "Ask the Fed(itorial)" service are accessible only to Ask the Fed participants, who
will receive alerts via their e-mail whenever the updates occur, usually after a monthly call.
For more information on Ask the Fed, contact Erik Soell, director of Ask the Fed, at 314-444-7358, or go to

C E N T R A L B A N K E R | FA L L 2 0 0 9

Views: Commercial Bank Lending Data during the
Crisis: Handle with Care
Silvio Contessi , Hoda El-Ghazaly
Since the financial crisis began in mid-2007, media sources and academics alike have scrutinized data from
the banking sector to understand how lending to consumers and firms has changed. The graph shows total
loans and leases by commercial banks and their components: real estate loans, individual loans, commercial
and industrial loans, and other loans. This measure is part of the H.8 data, which provide weekly aggregate
balance sheet data for commercial banks with a charter in the United States.
If considered over the past three decades, the series appears approximately on trend but slightly erratic during
the current recession; total loans and leases remains fairly constant until the end of Q3 2008, when it
increases sharply and then declines.
If our goal is to understand changes in lending dynamics, particularly over the past few quarters, do the graph
series imply that commercial bank lending increased in the last few months of 2008 and then bank lending to
the public contracted? Not quite. Several reasons suggest reading such data with extreme care.
First, existing loans and leases at each point in time are equilibrium quantities that depend on the interaction
between the supply and demand of credit. Whether the observed decrease in the series is caused by banks
restricting their lending or by borrowers demanding less credit during a major recession remains unclear.
Second, commercial banks are responsible for only a fraction (about 35 percent) of financial intermediation in
the U.S. economy. The H.8 release does not include the loans of other intermediaries (thrifts and nondepository institutions); therefore, just because we do not observe a large contraction in this volume of total
loans and leases does not mean that a contraction in the overall economy has not occurred. In fact, evidence
suggests that other credit markets have been severely strained.
Third, since the onset of the crisis, several financial services companies and thrifts that made loans to
consumers and firms (but whose loans were not included in the H.8 release) have either become commercial
banks or have been acquired by commercial banks. When a commercial bank acquires a thrift, an insurance
company or another financial firm, the loans of the target (acquired) company suddenly appear as additional
commercial bank loans even though no real change in credit took place in the economy.
Many such transactions have occurred since the crisis began, creating an upward shift to the series that
cannot be interpreted as an increase in lending. (Take, for example, the acquisition of the banking operations
of Washington Mutual by JPMorgan Chase on Sept. 25, 2008.)
Fourth, evidence indicates that firms and individuals are taking advantage of their previously unused (but
committed) bank credit lines, just as they did in previous periods of credit contraction. If banks grant only a
handful of new loans but borrowers continue to draw from existing lines of credit available at commercial

banks, the end result would appear to be an increase in lending. At the same time, commercial banks may be
withdrawing part of their commitments, which would not be recorded in balance sheet and H.8 data.
Finally, this series may be affected by the programs implemented by the Treasury and the Federal Reserve (for
example, the Troubled Asset Relief Program or the Term Auction Facility), and may have been very different
without these interventions.
These caveats indicate that caution is necessary when making inferences based solely on aggregate loans

Total Loans and Leases of Commercial Banks

This article is adapted from an Economic Synopsis published Aug. 6. Economic Synopses provide brief
encapsulations of current economic issues. See more at

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Views: As In the Past, Reform Will Follow Crisis
James Bullard, president of the Federal Reserve Bank of St. Louis and a non-voting member of the Federal
Open Market Committee, writes in the current issue of Regional Economist that:
Historically, crises have led to significant legislation. For example, the panic of 1907 led to the Federal
Reserve Act of 1913, which established the Federal Reserve as the central bank. Out of the Great Depression
came the Glass-Steagall Act, which established the Federal Deposit Insurance Corp. and separated
commercial from investment banking. The thrift crisis in the late 1980s led to the enactment of the Federal
Deposit Insurance Corp. Improvement Act (FDICIA) of 1991, which mandated prompt resolution of failing
banks and new standards for bank supervision, regulation and capital requirements.
Read the entire column.

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Tools: Rapid Response Keeps Examiners up to
When examiners come to your bank, you expect them to have the latest understanding of regulations,
guidelines and issues affecting the banking system. When the financial crisis erupted last year, and changes
started coming rapidly, the Federal Reserve immediately saw the need to provide examiners detailed and
pertinent information on emerging issues. And the St. Louis Fed took on the responsibility for getting it done
by designing and implementing a program called Rapid Response.
"We knew that discussions were going on informally about supervisory issues. So, we elevated those
discussions to a learning experience for anyone who saw the topic as relevant," says the Fed's Erik Soell, who
manages the program on a daily basis.
"Examiners already understood the regulations. What they needed was the wider context on the practical
implications in the current environment," he says. "Until now, there hadn't been an outlet on this scale that
could provide such information."
Rapid Response examiner conference calls are held once or twice a week. Examiners receive an e-mail
invitation to register for the session.
One recent session was held on the registered warrants issued by the state of California. Regulatory guidance
was issued on July 8, and a System-wide training conference was held the following day. As with most
sessions, state bank examiners were also invited to participate. Because of the call, Fed and state examiners
nationwide understood the risk and issues facing the banks that were asked to accept the warrants.
Phil Herwig, a senior examiner for safety and soundness at the St. Louis Fed, reports that Rapid Response
helps fulfill his duties. "A Rapid Response session can provide a good overview of a particular topic, which
helps me develop a better action plan when examining for that topic," Herwig says. "It's also helpful to have
current information about a particular issue, and a more global perspective on the issue's implications, when
having discussions with bank management during an examination."
Post-session surveys confirm that the program is helping Fed examiners do their job more effectively with bank
holding companies and state member banks, explains Julie Stackhouse, senior vice president of Banking
Supervision, Credit and the Center for Online Learning. "In addition to our post-session surveys, we receive
feedback through anecdotal e-mails and phone calls. The feedback tells us that the sessions are bringing to
light the experts in the Fed System, making it easier to know whom to call when questions arise during an
examination," Stackhouse says. "A participant from one Fed even told us that he had seen better alignment in
views with state banking regulators because of the shared training."
While established because of the financial crisis, Rapid Response will likely outlast the current financial and
economic difficulties. "I don't think there will be a time that we won't need Rapid Response, because it's a
concept that goes beyond the current crisis," Soell says. "In the future, we could scale it back to once a week,

then once a month after the recession and crisis are over, because Rapid Response fills a need regardless of
the current economic landscape."
Banking Supervision and Regulation's Erik Soell explains how Rapid Response helps examiners and bankers.

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Tools: Is Your Bank Physically Prepared for the
Bankers across America are re-examining their financial safety and soundness during the current financial
crisis. At the same time, bankers may also want to consider their physical contingency plans.
You would rather not be caught flat-footed by natural disasters such as floods, tornadoes, ice storms and
severe thunderstorms, or even swine flu and bird flu pandemics and terrorist attacks. While the last three may
seem unlikely, it's better to be prepared. Here are some considerations you may want to revisit:
Do contingency plans go beyond technology functions?
Is there more than one alternative site for conducting business, including back-end operations?
Is there a central location from which to deploy plans of action?
Are plans tested regularly?
Are newer staff members and the board of directors familiar with the plans?
Are contingency plans in writing and easy to find?
Are data storage and backup efforts up to date with today's technology and operating environment?
Is there a network of vendors with whom to coordinate alternative plans?
Is there a clear plan for communicating with your constituents?
>>Read more:
Lessons from Katrina

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Regulations Spotlight
Significant Changes Proposed for Truth in Lending
The Federal Reserve Board in July proposed significant changes to two components of Regulation Z (Truth in
Lending) designed to improve disclosures consumers receive for closed-end mortgages and home-equity lines
of credit (HELOCs).
To shop for and understand the cost of credit, consumers must be able to identify and understand the key
terms of the mortgage. The Board used consumer testing to ensure that providers give the most essential
information at a suitable time, using content and formats that are clear and conspicuous. Therefore, under the
proposed changes, disclosures would need to highlight potentially risky features, such as adjustable rates,
prepayment penalties and negative amortization.
The public comment period for both proposals ends Nov. 27, 2009. For details, see the Board's press release.
To comment on either component, go to the Board's Proposals for Comment page and scroll down to use the
comment links under the titles Regulation Z — Truth in Lending — Home-Equity Lines of Credit (HELOC) [R1367] and Regulation Z — Truth in Lending — Closed-end Mortgages [R-1366].

Accurate Consumer Report Rules Effective in July 2010
This final rule affects all financial institutions and other entities that report information to credit bureaus and
other consumer reporting agencies, which is widely used to determine consumers' eligibility for credit,
employment, insurance and rental housing.
The rules and guidelines take effect July 1, 2010. Under the rules, entities that furnish information about
consumers to consumer reporting agencies generally must include a consumer's credit limit in the information
provided. The federal agencies also published an Advance Notice of Proposed Rulemaking (ANPR) to identify
possible additions to the information that furnishers must provide to consumer reporting agencies, such as the
account opening date.
Also, under the rules, if a consumer believes his or her credit report includes inaccurate information, the
consumer may submit a dispute directly to the entity that provided the information to the consumer reporting
agency, and that entity must investigate the dispute. The rules do not change a consumer's ability to submit a
dispute to a consumer reporting agency or a furnisher's duty to investigate a dispute referred by a reporting
agency. Read the final rules.

Interim Final Rule Effective for Certain Modified Mortgage Loans
The federal bank and thrift regulatory agencies issued an interim final rule that provides that mortgage loans
modified under the U.S. Department of the Treasury's Making Home Affordable Program (MHAP) will retain the
risk weight applicable before modification.

Earlier this year, the Treasury announced guidelines under the MHAP to promote sustainable loan
modifications for homeowners at risk of losing their homes to foreclosure. The interim final rule would provide
a common interagency capital treatment for mortgage loans modified under MHAP. For example, mortgage
loans risk weighted at 50 percent prior to modification would continue to be risk weighted at 50 percent after
modification provided they continue to meet other applicable criteria. Interim Rule took effect July 30.
Read more.