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WINTER 2013/2014


N e w s a n d V i e w s f o r E i g h t h D i s t r i ct B a n k e r s

Featured in this issue | Community Depository Institutions Advisory Council Welcomes New Members |
Mapping the Global Shadow Banking System | Agriculture Boom Continued in 2013

2013 Community Banking
Performance: A Year of Recovery
By Gary S. Corner and
Michelle Clark Neely


ommunity banks, both nationally
and in the Eighth Federal Reserve
District, faced an improving economic
climate in 2013, but continued to experience challenges in building on the
gains they had made since the financial crisis.1 The following is a more
detailed look at 2013 performance over
a few key metrics.

Return on Assets
Although asset quality continued
to improve, earnings growth stalled
overall. Return on average assets
(ROA) for District community banks
averaged 1.01 percent at year-end 2013,
unchanged from its third-quarter level
and down just 1 basis point (bp) from
year-end 2012. Nationally, community
banks posted slightly better results,
with ROA averaging 1.06 percent at
year-end 2013, down 1 bp from the
third quarter, but up 7 bps from yearend 2012. Within District states, ROA
at year-end 2013 ranged from a low of
0.84 percent at Illinois banks to a high
of 1.31 percent at Arkansas banks.

Net Interest Margin
Net interest margin (NIM) compression—a challenge for most community
banks these past few years—eased
somewhat in the fourth quarter, with
margins remaining unchanged or up
slightly from their third-quarter levels.

While 2013 may have been a year to clean up
the remaining problems from the financial
crisis, it appears as though 2014 will be a
year of planning and transition for many
community banking organizations.
NIM at District community banks
averaged 3.86 percent at year-end
2013, up 3 bps from the third quarter,
but still down 11 bps from year-end
2012. The trend nationally among
community banks was much the same,
with average NIM rising 3 bps in the
fourth quarter to 3.79 percent.
Rising interest income and declining
interest expenses boosted margins at
community banks both nationally and
in the District in the fourth quarter.
With most bankers still reporting tepid
loan demand, it is doubtful margins
will rise significantly anytime soon.
Loans as a percentage of assets hovers
close to 60 percent on average at District banks, which is about 10 percentage points below its precrisis level.
Further, net noninterest expenses
have crept up in recent quarters, putting added pressure on earnings.

Noninterest Expense
The net noninterest expense ratio—
noninterest expenses less noninter-

T h e F e d e r a l R e s e r v e B a n k o f St . L o u i s : C e n t r a l t o A m e r i c a ’ s Ec o n o m y ®

continued on Page 5


Central view

Vol. 23 | No. 4

Opportunities Are Present
among Uncertainty


By Julie Stackhouse

News and Views for Eighth District Bankers

RC Balaban
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.
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FRED is a registered trademark of the
Federal Reserve Bank of St. Louis


am often asked: “Is the banking
crisis over? Has the performance of
banks returned to ‘normal’?”
While we have seen great progress,
the news is still mixed. Earnings for
community banks have rebounded;
however, pressure on net interest
margins remains a concern. In recent
years, many banks have benefited from
Julie Stackhouse
a high volume of mortgage refinancing
is senior vice
activity and the associated fee income,
president of Banking
but that activity has now fallen off.
Overall, community banks report weak
Credit, Community
loan demand and fierce competition for
Development and
high-quality small business loans and
Learning Innovation
commercial and industrial loans.
for the Federal
Many of the aforementioned chalReserve Bank of
lenges are a result of an extended low
St. Louis.
interest rate environment. But other
factors, including regulatory changes,
are also having an impact. Often cited are the new Abilityto-Repay (ATR) rule, the Qualified Mortgage (QM) rule and
enhanced emphasis on consumer protection.
With respect to the ATR rule, community banks are
uncertain how regulators will interpret ATR requirements.
Often cited are borrowers with disrupted income streams
or those who are unwilling to fully disclose income information. Likewise, banks are uncertain about whether to
extend credit for mortgages that do not meet the QM rules.
Community banks tell me that some non-QM mortgages
will be made, but they will be exceptions and not the norm.
It remains unclear what effect these decisions will have
on mortgage credit availability. I believe we’ll need a few
more quarters of data to really start assessing the impact of
this rule.

Hiring even one additional staff member to
address compliance laws and regulations can be
significant for smaller community banks.
Community banks also cite the Affordable Care Act as creating uncertainty for businesses. The delay in implementing
the act’s mandates, while granting a temporary reprieve for
many businesses, has also resulted in some confusion over
the true impact of the act’s costs. Community banks are
trying to understand the effect on small business balance
sheets and, ultimately, the impact on demand for credit.
continued on Page 4

2 | Central Banker

Q u a r t e r ly R e p o r t

Earnings, Asset Quality and Capital:
Community Banks and Thrifts
2012: Q4

2013: Q3

2013: Q4

Return on Average Assets

All U.S. Banks
All Eighth District States
Arkansas Banks
Illinois Banks
Indiana Banks
Kentucky Banks
Mississippi Banks
Missouri Banks
Tennessee Banks
















Net Interest Margin

All U.S. Banks
All Eighth District States
Arkansas Banks
Illinois Banks
Indiana Banks
Kentucky Banks
Mississippi Banks
Missouri Banks
Tennessee Banks

2013: Q3

2013: Q4

All U.S. Banks
All Eighth District States
Arkansas Banks
Illinois Banks
Indiana Banks
Kentucky Banks
Mississippi Banks
Missouri Banks
Tennessee Banks










return on equity

net noninterest expense ratio

All U.S. Banks
All Eighth District States
Arkansas Banks
Illinois Banks
Indiana Banks
Kentucky Banks
Mississippi Banks
Missouri Banks
Tennessee Banks

2012: Q4
problem assets

All U.S. Banks
All Eighth District States
Arkansas Banks
Illinois Banks
Indiana Banks
Kentucky Banks
Mississippi Banks
Missouri Banks
Tennessee Banks
tier 1 leverage ratio

All U.S. Banks
All Eighth District States
Arkansas Banks
Illinois Banks
Indiana Banks
Kentucky Banks
Mississippi Banks
Missouri Banks
Tennessee Banks

Loan Loss Provision Ratio

All U.S. Banks
All Eighth District States
Arkansas Banks
Illinois Banks
Indiana Banks
Kentucky Banks
Mississippi Banks
Missouri Banks
Tennessee Banks

SOURCE: R eports of Condition and Income for Insured Commercial Banks
Community banks and thrifts are those institutions with assets
of less than $10 billion. The All U.S., Eighth District and Missouri
categories exclude Missouri-based institutions which had large
and unusual noncore earnings to avoid significantly skewing the
2013 category results.

nonperforming LOANS

All U.S. Banks
All Eighth District States
Arkansas Banks
Illinois Banks
Indiana Banks
Kentucky Banks
Mississippi Banks
Missouri Banks
Tennessee Banks

Central Banker Winter 2013/2014 | 3

CDIAC Welcomes
New Members
The Federal Reserve Bank of St. Louis hosted its 2013 Community Depository Institutions Advisory Council (CDIAC)
on Oct. 7-8. The 12-member council meets twice a year to
advise St. Louis Fed President James Bullard and senior Bank
management on the credit, banking and economic conditions
facing their institutions and communities. Continuing to serve
as the group’s chairman is Glenn D. Barks, president and CEO
of First Community Credit Union in Chesterfield, Mo. Council
members serve staggered terms and are senior executives of
banks, thrift institutions and credit unions from across the
Eighth District.
Barks is currently serving a four-year term as chairman,
which began during CDIAC’s first 2013 meeting. In this role,
he represents the Eighth District at the Federal Reserve
Board of Governors’ CDIAC meetings, held twice each year
in Washington, D.C. The Board established CDIAC in 2010
as a mechanism for community banks, thrift institutions and
credit unions with assets of $10 billion or less to provide the
Board with input on the economy, lending conditions and
other issues. Each of the Fed’s 12 Reserve banks established
an advisory council, with one representative to serve on the
Board’s CDIAC.

Outgoing and Incoming Council Members
For 2014, the three outgoing members of the St. Louis Fed’s
CDIAC will be Gary E. Metzger, president of Liberty Bank in
Springfield, Mo.; Vance Witt, chairman of BNA Bank in New
Albany, Miss.; and Gordon Waller, president and CEO of First
State Bank and Trust in Caruthersville, Mo. The new council
members taking their places will be John Haynes, president
and CEO of Farmers and Merchants Bank in Baldwyn, Miss.;
Dennis McIntosh, chairman, president and CEO of Ozarks
Federal Savings and Loan Association in Farmington, Mo.; and
Gregory Ikemire, president and CEO of Peoples State Bank in
Newton, Ill. The new members will begin their terms when
the council meets in March.
For more information, see the St. Louis Fed’s CDIAC web
site. For more information and background about all the
Federal Reserve CDIACs, see the Board’s web site or “Community Banks, Fed Connect Through the Community Depository
Institutions Advisory Council” on the Fed’s Community Banking Connections web site.

4 | Central Banker

Central View
continued from Page 2

Community banks also express concern over escalating costs associated
with consumer compliance expectations. Hiring even one additional staff
member to address compliance laws
and regulations can be significant for
smaller community banks. Larger
banks point to the opportunity costs of
adding resources to address growing
consumer compliance expectations.
This uncertainty, combined with the
fact that more than 450 community
banks are still on the Federal Deposit
Insurance Corp.’s problem bank list,
has some bankers expecting an uptick

There is a role for wellmanaged banks in our
communities. Those banks
planning for the challenges
will be best positioned to
survive them.
in merger and acquisition activity.
Indeed, the data suggest that merger
and acquisition activity is returning to
precrisis levels. However, acquisition
prices are much lower. It’s also important to note that the conveniences
created by widening technology have,
in some instances, diminished the
value of traditional full-service brickand-mortar branches. As customers
embrace the conveniences of technology, the industry has evolved, resulting in some branch consolidation.
We clearly see challenges for community banks. Regardless, I remain
optimistic. There is a role for wellmanaged banks in our communities. Those banks planning for the
challenges will be best positioned to
survive them.

Community Banking Performance
continued from Page 1

est income divided by average earning
assets—ticked up 5 bps year over year in
the District to 1.97 percent. A combination of declining noninterest income and
rising noninterest expenses—a trend
mirrored in most District states—caused
the increase. Nationally, the noninterest
expense ratio for community banks was
up 6 bps year over year in the fourth
quarter; a slight increase in noninterest income was more than offset by a
7-basis-point increase in the ratio of
noninterest expenses to average earning assets.

Loan Loss Provisions
Falling loan loss provisions continued to boost earnings, though the effect
lessens with each passing quarter. The
ratio of loan loss provisions to average assets declined 1 bp between the
third and fourth quarters in both the
District and the U.S. Compared with
one year ago, the loan loss provision
ratio is down 18 bps at District banks
and 20 bps at community banks across
the nation. Most analysts believe loan
loss provisions have bottomed out, and
a number of institutions have recorded
negative provisions in recent quarters.

Nonperforming Assets
The worst of asset quality turbulence
appears to have subsided for community banks. The problem assets ratio—
defined as the ratio of nonperforming
loans and other real estate owned
to total loans and other real estate
owned—declined 86 bps year over year
and 25 bps in the past quarter at District community banks. National peers,
by comparison, experienced a slightly
larger year-over-year improvement of
94 bps in the average problem assets
ratio, but the measure remains 8 bps
higher than that of the District average.
With the problem assets ratio reduced
to 2.75 percent, District community
banks are now near the percentage
found at the end of 2008, early in the
financial crisis. While still not at a precrisis benchmark, the level is more than
200 bps under its peak in early 2011.
Similarly, nonperforming loans as a
percentage of total loans declined 47
bps at District community banks over
the past year and 14 bps in the past
quarter. This improvement places the

nonperforming loan ratio at a much
more manageable 1.65 percent. While
community banks nationally experienced a larger decline of 68 bps during
the year, their average nonperforming
loan ratio remains nearly 36 bps higher
than that found at District institutions.
The pace of improvement has slowed
both in the District and nationally,
as nonperforming loans and problem
assets revert to their more normalized

Capital Levels
With a range of 9.8 percent to 10.8
percent, tier 1 leverage ratios are
relatively strong at community banks
across the United States. Generally
high levels of investor participation in
the Treasury’s Troubled Asset Relief
Program auctions provided a signal that
confidence in the community banking
sector has rebounded.
Despite the improvements in earnings
and asset quality since the end of the
financial crisis, significant challenges
remain. One important long-term challenge for community banks is to achieve
a satisfactory return for their investors.
Though return on equity has rebounded
from its depressed level at the peak of
the financial crisis at most community
banks, it may remain below that of an
attractive long-term rate. Most community banks have seen their credit-related
costs return to a precrisis level and have
trimmed operating expenses where possible. However, generating additional
revenue, whether found in the expertise
to achieve profitable loan growth or the
skill to generate new sources of noninterest income, is a challenge.
Today, we find most community
banking organizations moving from
crisis management to planning for the
challenges ahead. While 2013 may have
been a year to clean up the remaining
problems from the financial crisis, it
appears as though 2014 will be a year of
planning and transition for many community banking organizations. Those
that plan well and appropriately manage risk will be in stronger competitive
positions than their peers.
Gary S. Corner is a senior examiner and
Michelle C. Neely is an economist, both with
the Federal Reserve Bank of St. Louis.
1 Community banks are defined here as institutions
with total assets of less than $10 billion.
Central Banker Winter 2013/2014 | 5

Bank Regulators Detail New
Liquidity Standard for SIFIs
By Michelle Clark Neely


n the wake of the financial crisis,
international banking regulators
have sought tools to better evaluate
and manage risks in the banking sector. One of those tools—the liquidity
coverage ratio (LCR)—was designed
to ensure that systemically important
financial institutions (SIFIs) have a
30-day supply of high-quality assets
that can be quickly converted into cash
in the event of a liquidity crunch.1
In October, the Board of Governors
put out for comment a joint proposal to
implement the LCR. (Comments closed
Jan. 31.) To be compliant with the rule,
banks will need to hold enough highquality liquid assets (HQLA) to cover
the difference between their projected
cash outflows and inflows during a
specified number of days. The size of
the LCR varies by bank size and institution type. The LCR is calculated by
dividing an institution’s HQLA by its
projected net cash outflows.
The largest domestic banks and nonbank SIFIs—those with total assets of
more than $250 billion—are called covered companies, and they need enough

Composition of and Limits on High-Quality Liquid
Assets in LCR

Permitted Assets

Haircut and Limits

Level 1

·· Excess reserves held at Fed
·· Withdrawable reserves held at foreign central
·· Securities issued by/guaranteed by U.S. government
·· Certain securities that are claims on/guaranteed
by a sovereign entity, a central bank and other
international entities that are assigned 0 weight
in Basel capital rules

No haircut, no limits

Level 2A

·· Claims on/guaranteed by a U.S. governement
sponsored enterprise (Freddie Mac, Fannie Mae,
Farm Credit System and Home Loan Banks)
·· Claims on/guaranteed by sovereign entity or
multilateral development bank that are assigned
a 20 percent weight in Basel capital rules

15 percent haircut, up
to 40 percent of HQLA
when combined with
Level 2B assets

Level 2B

·· Investment-grade, publicly traded corporate debt
·· Publicly traded stocks that are included in the
S&P 500 Index or equivalent (that meets supervisory approval)

50 percent haircut, up
to 15 percent of HQLA

6 | Central Banker

HQLA on hand to survive a 30-day
stress period. The stress period for
institutions with assets of $50 billion to
$250 billion—the so-called “modified”
LCR companies—is 21 days. Under the
Board’s proposal, banks with assets of
less than $50 billion are exempt from
the rule, as are depository institution
holding companies, designated companies with substantial insurance operations, and savings and loan holding
companies with substantial commercial operations.
Assets that can be designated HQLA
must be liquid and readily marketable,
a reliable source of funding in repo or
sales markets and not an obligation of
a financial company. The Board has
divided HQLA—the numerator of the
LCR—into three categories, and limits
are placed on how much each asset type
and category can contribute to the total.
For the denominator—the difference
between an institution’s total stressed
cash outflow and inflow amounts,
or net cash outflows—the technical
definition is designed to distinguish
between stable funding sources, like
core deposits, and more volatile ones,
like brokered deposits. Liabilities are
assigned to one of five outflow categories: secured retail funding, unsecured
wholesale funding, secured short-term
funding, commitments and Federal
Reserve Bank borrowings. Outflow
rates are assigned to each category
to capture the likelihood that these
liabilities won’t stick. For secured
retail funding, for example, stable
retail deposits that are fully insured by
the Federal Deposit Insurance Corp.
are assigned an outflow rate of 3 percent, while uninsured retail-brokered
sweep deposits are assigned a 40
percent outflow rate. At the extreme
end, commercial paper and short-term
secured funding not backed by HQLA
receive outflow rates of 100 percent.
An institution with an LCR of 100
percent or more complies with the
rule, with a few caveats. First, cash
inflows are capped at 75 percent of
cash outflows to ensure that a portion
of an institution’s liquidity needs are

met by HQLA. Second, an institution’s
primary federal banking regulator can
require it to hold more HQLA than the
U.S. minimum or take other actions to
boost liquidity if deemed insufficient.
The U.S. LCR proposal is consistent with the Basel standard in most
respects but is more restrictive in some
areas. Under Basel III, bankers have
until Jan. 1, 2019, to be in full compliance with the liquidity standards. Covered and modified LCR U.S. companies
will be subject to a more accelerated
schedule—beginning in 2015—and will
need to be fully compliant by Jan. 1,
2017. Another difference between the
Basel III standard and the U.S. LCR
proposal is that covered U.S. companies
need to hold HQLA against the largest
net cumulative cash outflow during a
30-day period, rather than the outflow
at the end of a 30-day period. Modified
LCR companies use a 21-day period and
measure net cumulative outflow at the
end of that 21-day period.
In addition to concerns about the
toughness of the U.S. proposal compared with its Basel III counterpart,
commenters have noted problems reconciling the LCR with other regulatory
changes. Officials from the nation’s
largest banks have complained that a
proposal to implement a supplementary leverage ratio conflicts with the
goal of having institutions hold more
liquid assets. They argue that a higher
leverage ratio would put pressure on
banks to hold only the barest minimum of liquid assets on their books
and to forgo activities that create liquid
assets on balance sheets. Analysts
have also wondered what will happen
to the prices of very liquid assets when
the Federal Reserve begins to unwind
its balance sheet and competition
heightens for what could be a dwindling supply of HQLA.
Michelle Clark Neely is an economist with the
Federal Reserve Bank of St. Louis.
1 Another tool—the net stable funding ratio
(NSFR)—is under development but is not
expected to take effect until 2018. The purpose
of the NSFR benchmark is to ensure banks are not
overly reliant on wholesale short-term funding.

Troubled Debt
Guidance Updated
By David Benitez


n Oct. 24, the Federal Reserve, the Federal Deposit
Insurance Corp., the National Credit Union Administration and the Office of the Comptroller of the Currency issued supervisory guidance regarding troubled
debt restructurings (TDRs).
TDRs are defined under generally accepted accounting principles (GAAP) as concessions that creditors
would otherwise not consider granting to debtors due to
economic or legal reasons related to the debtors’ financial difficulties. Creditors restructure troubled debts to
improve loan performance and reduce credit risk.
The guidance reiterates existing policy related to the
accounting treatment and credit risk grading of loans
that have undergone TDRs. The guidance also discusses
the definition of collateral-dependent loans and the circumstances in which charge-offs are required for TDRs.
A loan modified as a TDR can be in either accrual
or nonaccrual status when modified. If in nonaccrual
status, the loan can be restored to accrual status while
a TDR by performing a current and well-documented
credit analysis. A loan already in accrual status can be
maintained by performing a credit analysis while also
ensuring that the debtor is able to maintain a sustained
repayment period of at least six months.
The guidance describes credit risk classification and
clarifies that while most TDR loans will have a classified
risk rating (due to the requirement of having a documented financial difficulty on the part of the debtor),
such a rating is not automatic, and the loan doesn’t have
to remain in an adverse risk rating forever. The guidance again states that a credit analysis should be done to
determine the correct risk rating for the loan.
Finally, the guidance clarifies the existing policy
regarding defining collateral-dependent loans. All TDR
loans are considered impaired loans under GAAP, and
all impaired loans must be judged to determine whether
they are collateral-dependent to conclude the level
of impairment. The guidance explains what must be
evaluated to come to that determination.
For more information on TDRs, you can view the Federal Reserve Board of Governors’ version of the interagency guidance here:

David Benitez is a policy analyst at the Federal Reserve Bank of
St. Louis.

Central Banker Winter 2013/2014 | 7

Mapping the Global Shadow
Banking System
By Amalia Estenssoro


he Financial Stability Board (FSB)
has been estimating the size of
the shadow banking industry for the
past few years. However, the FSB has
also been attempting to refine these
estimates to filter out certain activities
that do not imply direct credit intermediation and to avoid double-counting
assets. The progress made by the
FSB could change the perspective on
potential regulation.
After the leading rich and developing (G-20) nations agreed to the Basel
III standards in November 2010, reguFIGURE 1

Total Assets of Financial Intermediaries
(20 Jurisdictions and Euro Area)

Trillions of dollars












Central banks

OFI = shadow banking system

Public financial institutions

Insurance companies and pension funds


Percentage of total shadow banking system

Share of Assets from Nonbank Financial









Euro area

8 | Central Banker




latory attention shifted to the shadow
banking sector, defined as “financial
intermediaries that conduct maturity, credit and liquidity transformation without explicit access to central
liquidity of public sector guarantees.”1
In October 2011, the FSB issued its
report “Shadow Banking: Strengthening Oversight and Regulation,” which
is updated annually and included how
to better understand, measure and
regulate the shadow banking sector.2
The results have been presented
to the G-20 annually since 2011, with
the latest report issued in November
2013.3 According to the FSB’s November 2013 monitoring report, the global
shadow banking sector accounted for
$71.2 trillion of assets at the end of
2012, up from $26.1 trillion in 2002.
The assets account for 24 percent of
total financial assets and 52 percent of
regulated banking system assets in 20
global jurisdictions, plus the euro area
(Figure 1).
The shadow banking system is concentrated in economically developed
nations, which make up 85 percent
of the total estimated global shadow
sector. The U.S.’s $26 trillion in assets
in 2012 represents the largest share,
followed by the euro area, the U.K. and
Japan, with $22 trillion, $9 trillion and
$4 trillion in assets, respectively (Figure 2). The remaining jurisdictions
account for a very small share of the
total. However, from their relatively
low base, 10 emerging market jurisdictions have been posting the fastest
growth rates. In particular, China,
Argentina, India and South Africa
posted growth rates above 20 percent
in 2012.
Shadow banking is composed of an
extremely diversified subset of institutions, including broker-dealers, money
market mutual funds, structured
finance vehicles, financial companies
and investment funds, among many
others. The largest portion of the sector comprises investment fund companies, totaling $21 trillion in assets, or
35 percent of the total. The November
2013 report contained a breakdown of
investment fund companies into equity


Investment Funds Breakdown

Equity funds
Bond funds

Recognizing the diversity of the shadow
banking sector can add perspective on how
to regulate it.

Not equity or
bond funds
Other funds

funds, bond funds and others, with
equity funds being by far the largest
with $9 trillion invested (Figure 3).
Also according to the report, hedge
funds comprise only 0.2 percent ($0.1
trillion) of the total shadow banking
sector. However, the International
Organization of Securities Commissions has estimated that the global
hedge fund industry, predominantly
domiciled in offshore jurisdictions not
included in the FSB report, accounted
for $1.9 trillion in net assets under
management at the end of 2012. Adding the two estimates brings the hedge
fund industry to 3 percent of total
shadow banking sector assets.4
The FSB has attempted to refine
estimates of the shadow banking sector by filtering activities that do not
imply direct credit intermediation
and avoiding double-counting assets
already prudentially consolidated into
the regulated banking sector. A narrower and more “risk-focused” shadow
banking size estimate, presented for
the first time in this November 2013
report, is only a preliminary result
that does not yet include granular data
from all jurisdictions. The FSB report
more narrowly defines the shadow
banking sector by excluding equity
investment funds, which have no
direct credit intermediation function.5
This “risk-focused” estimate more
accurately depicts the shadow banking sector and reduces its size estimate without increasing the regulated
sector. The opposite was true during
the financial crisis when many shadow
banking institutions were consolidated
into the regulated banking sector,
including U.S. broker-dealers and
many off-balance-sheet structuredfinance vehicles.
Recognizing the diversity of the
shadow banking sector can add perspective on how to regulate it. First, it

is counterproductive to regulate every
existing financial intermediary as a
bank, because other institutions will
simply step into the market with innovative products to circumvent the regulation. Second, not all shadow banking
activities are systemically important or
carry contagion risk during a crisis. As
seen in recent regulation of over-thecounter derivatives and repo markets,
oversight by type of transaction and
transparency in previously unregulated
markets, where regulated banks and
shadow banking institutions transact
with each other, is far more important
than tailor-made shadow regulation by
institution.6 The G-20 has instead concentrated efforts in markets that were
channels of contagion during the crisis
and suffered asset fire sales and runs.
These include securities financing—
such as the repo market—and over-thecounter derivative markets.
Amalia Estenssoro is an economist at the Federal Reserve Bank of St. Louis.
1 Pozsar, Zoltan; Adrian, Tobias; Ashcraft, Adam;
and Boesky, Hayley. “Shadow Banking.” Federal
Reserve Bank of New York Staff Reports, July
2 “Shadow Banking: Strengthening Oversight and
Regulation.” Financial Stability Board, Oct. 27,
3 “Global Shadow Banking Monitoring Report
2013.” Financial Stability Board, Nov. 14, 2013.
4 “Report on the Second IOSCO Hedge Fund Survey.” The Board of the International Organization
of Securities Commissions, October 2013.
5 This report also nets out other assets already
consolidated into the regulated banking sector
and excludes self-securitization issues.
6 The exception being the tailor-made regulation
of money market mutual funds (MMMFs), which
should ensure that MMMF deposits do not act
like bank deposits without deposit insurance,
which are vulnerable to runs by investors.

Central Banker Winter 2013/2014 | 9

Agriculture Boom Continued in 2013
By Gary S. Corner


.S. agriculture has been booming
in recent years with record farm
incomes and double-digit percentage
increases in cropland prices. However, farm income projections suggest
a flattening, if not a reversal, of these
trends. 2013 may prove to be a peak
year, as analysts expect the agriculture
sector to experience lower commodity prices, normal crop production and
lower farm income over the next several years. Volatile weather patterns
and other competitive factors, however,
impact the reliability of such forecasts.

Farm Sector Income
Net farm income, as illustrated in
Figure 1, has more than doubled since
2000 and is expected to reach a record
$131 billion in 2013. On a cash basis,
income may fall slightly short of 2012
results, as farmers are storing signifiFIGURE 1

Net Farm Income and Net Cash Income, 2000–2013

Billions of dollars


Net cash income
Net farm income

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013


Farm Sector Debt Ratios, 1970–2013
Debt-to-equality ratio


Debt-to-asset ratio











SOURCE: U.S. Department of Agriculture, Economic Research Service, Farm
Income and Wealth Statistics. Data as of Nov. 26, 2013.
10 | Central Banker

cant amounts of corn in anticipation
of a recovery in corn prices. In the
near-term, this may be good news for
agriculture bankers, who may experience a pickup in loan demand as farm
working capital contracts. Recordsetting crop production has driven
earnings results this year, despite the
collapse in prices.

Profit “Bubble” and Cropland Values
While the agricultural profit bubble
observed in recent years shows early
signs of deflating, the average gains
in U.S. cropland continue. Further,
with multiple years of double-digit
percentage increases in cropland
gains, dramatic increases in commodity prices and low interest rates, some
economists and analysts are concerned
that an asset bubble exists in certain
U.S. cropland markets. The Northern
Plains and Corn Belt regions continued
to see persistent double-digit percentage increases in annual cropland price
gains in 2013.1
Based on the U.S. Department of
Agriculture’s latest annual survey, the
average value of all U.S. cropland was
$4,000 per acre, representing a 13.0
percent year-over-year increase and
a 49.8 percent five-year increase, as
shown in Figure 2. However, regional
differences provide a more complete
picture. Average cropland prices in
the Northern Plains rose 25.0 percent
year over year and 126.9 percent over
the past five years. The Corn Belt
averaged a 16.1 percent year-over-year
price gain and a five-year increase of
78.5 percent. By contrast, the Southeast region experienced an average
year-over-year decrease in cropland
prices of 2.8 percent and a five-year
decline of 13.8 percent. The highest
nominal land price value was found
in the Corn Belt, at an average price
of $6,980 per acre. Among Corn Belt
states, Iowa has the highest average
cropland price at $8,660 per acre, followed by Illinois and Indiana at $7,900
and $7,100 per acre, respectively. The
Missouri average is the lowest in the
Corn Belt at $3,800 per acre.
The expected decline in farm income
over the next several years and a
potential rise in long-term interest rates should put some downward

figure 3

Five-Year Change in Cropland Prices by Region (2009–2013)







SOURCE: Land Values 2013 Summary
(August 2013), U.S. Department of Agriculture, National Agricultural Statistics Service

pressure on land values. To that end,
Reserve banks’ third-quarter agriculture surveys are indicating some
mixed responses on future land price
increases. Perhaps this mixed data
is a first sign of a price softening that
would rationally follow a somewhat
dimmer outlook for crop producers. Given the current strength of the
farm sector, however, as indicated by
historically low debt-to-equity and
debt-to-asset ratios, the agriculture
industry appears poised to transition
to more normalized conditions if and
when they occur.


Farm Sector Balance Sheets


Unlike the boom/bust farmland
cycle of the 1980s, a commensurate
rise in farm leverage has not occurred
during this period of rapid land price
increases. Broadly, the sector’s debtto-asset ratio has fallen during the
price increase and stands at a historically low 10.3 percent according to the
USDA. This debt-to-assets ratio is less
than half of the 1980s farm crisis peak
ratio of 22.2 percent.
The 1980s farm crisis followed
a period of rapid farmland price
increases similar to what has occurred
since 2007. A 30 percent price decline
today, similar to what occurred in the
1980s, would raise the sector’s debtto-asset ratio modestly to 13.7 percent,
well below the peak ratio from the
1980s. Although the stronger balance
sheets of today’s farm sector may be
better able to withstand a 1980s-type
price correction, a 30 percent price
decline would still destroy most of the
land-centric wealth created since 2007.

Overall, the U.S. farm sector has
enjoyed an extended period of historically high income and land-centric
wealth building. Farm real estate
accounts for more than 80 percent of
farm assets, so cropland values matter.
Leverage associated with cropland
value gains has remained prudent,
which bodes well for the sector in an
inevitable downturn. On the other
hand, farm working capital may
decline as more inventories are stored.
This holdback may spur a higher
demand for credit. Whether this credit
demand materializes, however, is yet
to be seen.

Eighth District States’ Five-Year Change
in Cropland Values

2009 Avg. Value

2013 Avg. Value

Five-Year Percentage Change

SOURCE: Land Values 2013 Summary (August 2013), U.S. Department of Agriculture, National Agricultural Statistics Service

Gary S. Corner is a senior examiner with the
Federal Reserve Bank of St. Louis.
1 Northern Plains states include Kansas,
Nebraska, North Dakota and South Dakota.
Corn Belt states include Illinois, Indiana, Iowa,
Missouri and Ohio.
Central Banker Winter 2013/2014 | 11


Central Banker Online
See the online version of the Winter 2013–2014 Central
Banker at for regulatory spotlights,
recent St. Louis Fed research and additional content.

• Wealth Recovery Still
Not Complete, Remains
Uneven across Families
and Locations
• The Rise and (Eventual) Fall
in the Fed’s Balance Sheet
• Job Searching: Some
Methods Yield Better
Results than Others
• Lessons from the
Taper Tantrum

• The Recent Boom in
House Prices: Why Is
This Time Different?
• The Size and Growth of
Businesses Started During
the Financial Crisis

• Volcker Rule among
Several Recently Released
Final Rules

• U.S. Inflation and
Its Components

printed on recycled paper using 10% post-consumer waste

bitcoin and beyond

Join us Monday, March 31 for the
next presentation in our Dialogue
with the Fed series. David Andolfatto, St. Louis Fed vice president
and economist, will present “Bitcoin
and Beyond: The Possibilities and
the Pitfalls of Virtual Currencies.”
He will discuss how these currencies
work and whether they are a fad or a
new paradigm in payments, among
other topics.
The event features a reception at
6:15 p.m., with the presentation starting at 7 p.m. For more information
or to register, visit www.stlouisfed.
org/dialogue-bitcoin. The event
will also stream live via the web site.


Recent St. Louis Fed Banking and Economic
Wealth Recovery Still Not Complete, Remains Uneven across
Families and Locations
The December 2013 issue of In the Balance discusses how the average American household has nearly
recovered from the financial crisis, but certain families and areas of the country are still seeing greater
recoveries than others.

The Rise and (Eventual) Fall in the Fed’s Balance Sheet
Quantitative easing has led to the largest expansion of the Fed’s balance sheet since World War II. While this,
naturally, leads to concern about inflation, the Fed has the tools to unwind the balance sheet once the
economy builds steam.

Job Searching: Some Methods Yield Better Results than Others
Is one method of searching for a job better than another? Do job seekers change their approach when a
recession hits?

Lessons from the Taper Tantrum
Since November 2008, the Federal Open Market Committee (FOMC) has been using bond purchases to
reduce long-term interest rates to support housing markets, employment and real activity. The FOMC has
varied these large-scale asset purchases—commonly called quantitative easing (QE)—with the perceived
state of the economy. Its most recent incarnation of QE, QE3, announced in two phases (Sept. 13, 2012 and
Dec. 12, 2012), committed the Fed to monthly purchases of $85 billion in bonds.

U.S. Inflation and Its Components
The short-term volatility of the price of nondurable goods, especially energy, may explain why inflation
occasionally appears off target. The recent decline in average inflation may be partially attributable to the
ongoing reduction in the cost of durable goods and a significant deceleration in the inflation rate of services

The Recent Boom in House Prices: Why Is This Time Different?
The current housing boom is the first nationwide boom since the postwar era not driven by increased demand
for owner-occupied housing.

The Size and Growth of Businesses Started During the Financial
Firms started during recessions, especially those started in 2008, have grown less during the first three years
of their life than those started in nonrecession years.


Rules and Regulations: Volcker Rule among
Several Recently Released Final Rules
Agencies Request Comments on the Following Proposed Rules
OCC proposes guidelines establishing heightened standards for risk governance
frameworks for certain banks
The Office of the Comptroller of the Currency (OCC) is proposing guidelines establishing minimum standards
for the design and implementation of a risk governance framework for large insured national banks, insured
federal savings associations and insured federal branches of foreign banks with average total consolidated
assets of $50 billion or more. The proposed guidelines also outline minimum standards for a board of directors
in overseeing the framework’s design and implementation. Finally, the OCC also proposes making its safety
and soundness regulations applicable to both national banks and federal savings associations and to remove
the comparable federal savings associations regulations. Comments are due March 28.

FRS proposes amending risk-management standards
The Federal Reserve System (FRS) is proposing to amend the risk-management standards currently in
Regulation HH by adopting a common set of risk-management standards applicable to all types of financial
market utilities (FMUs), in accordance with the recently revised Principles for Financial Market Infrastructures.
Currently, Regulation HH has two standards: one for FMUs that operate a payment system and one for FMUs
that operate a central securities depository or a central counterparty. Comments are due March 31.

FRS requests comment of payment system risk policy
The Federal Reserve Board is proposing to revise Part I of its Federal Reserve Policy on Payment System
Risk Policy, which sets forth the Board’s views and related principals and minimum standards regarding the
management of risk in payment, clearing and settlement systems. The proposed changes are in light of
international risk-management standards, enhanced supervisory framework for designated FMUs under the
Dodd-Frank Act, and compliance with Regulation HH. Comments are due March 31.

FRS proposes rule facilitating electronic check collection and return
The FRS is proposing two alternative frameworks for return collection intended to encourage banks to send
and receive returned checks electronically. The first alternative would eliminate the expeditious-return
requirement and require notice of nonpayment regardless of the amount of the check. Under the second
alternative, the current two-day test would be retained for electronic returns but the notice of nonpayment
requirement would be eliminated. Comments are also requested on a change that would apply existing check
warranties to checks that are collected electronically and on new warranties and indemnities related to
electronic items. Comments are due May 2.

Final Rules
Several agencies issue final rule prohibiting banking institutions from engaging in
proprietary trading with hedge funds and private equity funds
On Jan. 31, the OCC, FRS, Federal Deposit Insurance Corp. (FDIC) and the Securities and Exchange
Commission (SEC) issued a final rule, pursuant to Section 619 of the Dodd-Frank Act (Volcker Rule),
prohibiting and restricting the ability of banking entities and nonbank financial companies from engaging in
proprietary trading and from having certain interests in, or relationships with, hedge funds or private equity
funds. This rule is effective April 1.

CFPB publishes revised consumer information publications
The Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to publish three consumer
information publications related to mortgage and home equity line of credit transactions: “What You Should
Know About Home Equity Lines of Credit,” “Consumer Handbook on Adjustable-Rate Mortgages” and
“Shopping for Your Home Loan: Settlement Cost Booklet.” The CFPB is making technical and conforming
changes to each of the three publications in conjunction with the January 2014 effective dates for many
provisions of the CFPB’s rulemakings regulating practices in mortgage origination and servicing. Those
institutions that distribute the publications may immediately begin distributing the revised publications or
continue distributing their current supply until exhausted. This was effective Jan. 10.

CFPB issues final rule and official interpretation on integrated mortgage disclosures
under RESPA and TILA
The CFPB issued a final rule that combines certain disclosures that consumers receive in connection with
applying for and closing on a mortgage loan under the Truth in Lending Act (TILA) (Regulation X) and the Real
Estate Settlement Procedures Act (RESPA) (Regulation Z). The CFPB’s rule establishes new disclosure
requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real
property. In addition, the final rule provides extensive guidance regarding compliance with those requirements.
This rule is effective Aug. 1, 2015.

CFPB issues final rule amending asset-size threshold for higher-priced mortgage loan
escrow exemption under TILA
The CFPB issued a rule amending its official commentary to Regulation Z to reflect a change in the asset size
threshold for certain creditors to qualify for an exemption to the requirement to establish an escrow account for
higher-priced mortgage loans. In 2014, loans made by creditors with assets of $2.2028 billion or less as of
Dec. 31 that meet the other requirements will be exempt from the escrow-accounts requirement for higherpriced mortgage loans. The asset-size threshold is being increased from its previous levels, set in January
2013. This rule was effective Jan. 1.

Several agencies issue final joint rule amending Community Reinvestment Act
regulations and asset-size thresholds
The FDIC, FRS and OCC issued a rule amending their Community Reinvestment Act regulations to adjust the
asset-size thresholds used to define “small bank” or “small savings association” and “intermediate small bank”
or “intermediate small savings association.” Beginning Jan. 1, 2014, banks and savings associations that, as of
Dec. 31 in either of the prior two calendar years, had assets of less than $1.202 billion are defined as small
banks or small savings associations. Small banks and small savings associations with assets of at least $300
million as of Dec. 31 of both of the prior two calendar years and less than $1.202 billion as of Dec. 31 of either
of the prior two calendar years are intermediate small banks or intermediate small savings associations. This
rule was effective Jan. 1.

Several agencies issue final rule amending appraisal requirements for higher-priced
mortgage loans under TILA
The CFPB, FRS and OCC issued a final rule revising TILA (Regulation Z) by requiring appraisals for higherpriced mortgage loans. On Aug. 8, the agencies published a proposed rule exempting certain transactions
from the appraisal requirements, namely transactions secured by existing manufactured homes and not land,
certain “streamlined” refinancings and transactions of $25,000 or less. Also proposed was a modified definition
of a “business day” and some technical corrections. The final rule adopts, in part, the proposed rule.
Specifically, the agencies are adopting exemptions for certain types of refinancings and transactions of
$25,000 or less (indexed for inflation) and a temporary exemption of 18 months for all loans secured in whole
or in part by a manufactured home. The agencies are not adopting the proposed definition of “business day.” A
revision to the exemption for “qualified mortgages” is adopted that is similar to the proposed revision, as well
as a few proposed nonsubstantive technical corrections. The rule was effective Jan. 18.

FDIC issues final rule rescinding certain regulations related to recordkeeping and
confirmation requirements for securities transactions
The FDIC issued a rule rescinding and removing 12 CFR part 390, subpart K, which was transferred from the
Office of Thrift Supervision to the FDIC in 2011, regarding recordkeeping and confirmation requirements for
securities transactions. The FDIC is also amending part 344 to clarify that the section applies to all insured
depository institutions. The proposed rule was published in the Federal Register on Sept. 4. This rule was
effective Jan. 24.

FRS issues final rule amending market risk capital rule
The FRS issued a rule revising its market risk capital rule by addressing recent changes to country risk
classifications, clarifying the treatment of certain traded securitization positions, making technical amendments
and clarifying timing requirements. This rule is effective April 1.

CFPB issues final rule amending annual threshold adjustments under the CARD Act
The CFPB issued a final rule implementing annual adjustments under the CARD Act and HOEPA, which are
amendments to the TILA. The CFPB final rule establishes the 2014 annual minimum interest charge disclosure
threshold and penalty safe harbor fees under the CARD Act and establishes the 2014 HOEPA annual
threshold adjustment for certain closed-end home mortgage loans and the revised fee trigger, as enacted
January 2013. This rule was effective Jan. 1.

HUD issues final rule defining “qualified mortgage” for HUD insured and guaranteed
single-family mortgages under TILA
The Department of Housing and Urban Development (HUD) issued a final rule adopting a definition of
“qualified mortgage” for HUD-insured single-family residential loans. The definition aligns with the statutory
ability-to-repay criteria of TILA and the CFPB. This rule was effective Jan. 10.

CFPB issues final rule defining larger participants of the student loan servicing market
The CFPB issued a final rule identifying larger participants of the student loan servicing market who are
covered persons subject to CFPB supervision. The rule amends the existing larger participant rule found at 12
CFR 1090. This rule was effective March 1.

FRS and Treasury issue final rule amending definitions of transmittal of funds and
funds transfers under the Bank Secrecy Act

Under the Bank Secrecy Act (BSA), banks and nonbank financial institutions are required to collect and retain
information on certain funds transfers and transmittals of funds. Section 919 of the Electronic Fund Transfer
Act (EFTA) created a comprehensive new system of consumer protections for remittance transfers sent by
consumers in the United States to individuals and businesses in foreign countries. The definitions of funds
transfers and transmittals under the EFTA would result in certain transactions falling outside the scope of the
BSA. This final rule amends the definitions of “funds transfers” and “transmittal of funds” to avoid currently
covered transactions from being excluded from BSA requirements. This rule was effective Jan. 3.

CFPB and FRS issue final rule adjusting exemption threshold under the Consumer
Leasing Act
The CFPB and FRS issued rules amending Regulation M (which implements the Consumer Leasing Act),
including the revisions to the threshold for exempt transactions. This rule adjusts the exemption threshold to
$53,500 and was effective Jan. 1.

CFPB and FRS issue final rule adjusting threshold for exempt consumer credit
transactions under the Truth in Lending Act
The Dodd-Frank Act amending TILA by requiring that the dollar threshold for exempt consumer credit
transactions be adjusted annually for inflation. The FRS and CFPB adjusted the exemption threshold to
$53,500 and was effective Jan. 1.

CFPB issues homeownership counseling organizations lists interpretive rule
On Jan. 31, 2013, the CFPB published a final rule pursuant to Regulation Z and RESPA requiring lenders to
provide federally related mortgage loan applicants with a reasonably complete or updated list of
homeownership counseling organizations located in the area of the lender. This final rule describes data
instructions for lenders to use in compliance with this requirement to provide a homeownership counseling list
using data made available by HUD. This rule was effective Jan. 10.

FHFA issues final rule removing references to credit ratings in various Federal Home
Loan Bank regulations
The Federal Housing Finance Agency (FHFA) issued a rule removing references to credit ratings issued by
nationally recognized statistical rating organizations in certain regulations affecting Federal Home Loan Banks
(FHLBs) related to the assessment of the credit worthiness of a security or money market instrument. The
FHFA is also adopting new provisions that would require the FHLBs to apply internal analytic standards and
criteria to determine the credit quality of a security or obligation. This rule is effective May 7.