anonymous

English

Research Papers in Economics

18  Federal Reserve Bank of San Francisco Annual Report 2008
T
he year 2008 was the most challeng-
ing one in decades for the nation’s 
banking  industry. As  a  whole,  the 
industry’s $16.1 billion annual profit 
was the lowest since 1990, mostly because 
of  sharply  higher  expenses  for  bad  loans. 
Some banks didn’t survive the year. In fact, 
failures  and  assistance  transactions  among 
institutions insured by the Federal Deposit 
Insurance  Corporation  (FDIC)  nationwide 
reached a 15-year high of 30, with the assets 
of these institutions totaling $1.7 trillion. In 
addition, by year-end 2008, 252 institutions 
were  on  the  FDIC’s  “problem  list”—those 
with the worst supervisory ratings—up dra-
matically from 76 at year-end 2007. 
Banking  organizations  with  significant 
exposure  to  the  housing  sector—typically 
through  residential  mortgages,  home  con-
struction loans, or investments in related se-
curities—experienced  the  greatest  deterio-
ration in financial performance. Asset qual-
ity and profits at these institutions suffered 
severely when home mortgage borrowers, 
building  contractors,  and  land  developers 
couldn’t make loan payments and when the 
value of mortgage-related securities plum-
meted. 
Moreover,  turmoil  in  financial  markets 
and shaken confidence among depositors cre-
ated funding problems across a broad range 
of  banking  organizations,  even  for  those 
without  investments  in  the  housing  sector. 
Some banking companies couldn’t maintain 
the stable deposit base they needed to sustain 
their operations, and the breakdown in finan-
cial  markets  forced  institutions  that  relied 
on those markets to scramble for alternative 
funding,  which  sometimes  was  available 
only at a very high price. 
Banking Performance in the Twelfth 
District
While several of the Twelfth District’s bank-
ing  organizations  have  significant  mortgage 
lending  operations,  many  more  provided 
construction financing to support the hous-
ing boom that occurred over the past several 
A Tough Year for 
the Banking Industry 
Banking Supervision and Regulation 
Banking  Supervision  and  Regulation  staff  assess  the  impact  of  the 
economic and financial environment on the banking industry and, since 
the crisis began, have been facilitating institutions’ access to government 
and Federal Reserve relief programs. Supervisory staff’s perspectives on 
banking conditions and the industry’s risk management capabilities help 
Credit and Risk Management staff manage the increased activity at the 
discount window and contribute to monetary policy decisions and policy 
responses to the crisis. 
Seated (Left to Right): Kathleen Brown, Pat Loncar, Josephine Chan 
Standing (Left to Right): Michele Magidoff, Jeff Plaskett, Elisa Johnson,  
Tom Cunningham, Joe LozanoFederal Reserve Bank of San Francisco Annual Report 2008  19
years.  In  fact,  quite  a  few  of  the  District’s 
community banks are concentrated in lend-
ing or other activities related to the housing 
sector. When residential real estate markets 
started to sour in 2007, the performance of 
those banks began to suffer. With the broader 
weakening  of  the  economy  and  financial 
market  turmoil  in  2008,  loan  quality  and 
earnings deterioration escalated, and some 
banks faced a liquidity crisis when nervous 
customers started to draw down deposits or 
close their accounts altogether.
Adjusting Supervisory Programs
The  Federal  Reserve  Bank  of  San  Fran-
cisco’s Division of Banking Supervision and 
Regulation promotes the safety and sound-
ness  of  the  banking  system  and  upholds 
compliance with regulations. The Division’s 
risk-focused  supervision  program  empha-
sizes  credit,  market,  liquidity,  operational, 
reputational, and legal risks in the region’s 
banking  organizations.  At  year-end  2008, 
the  Division’s  portfolio  of  institutions  in-
cluded  240  bank  holding  companies,  45 
state-chartered banks that are members of 
the  Federal  Reserve,  and  the  U.S.  opera-
tions of foreign banking organizations from 
24 different countries. Division staff super-
vise these institutions through a combina-
tion of on-site examinations (conducted in 
the  institutions’  offices)  and  off-site  work 
(conducted at the Reserve Bank). Examples 
of  activities  include  evaluating  risk  man-
agement  processes  and  internal  controls, 
monitoring financial performance and rel-
evant  market  conditions,  reviewing  loan 
documentation  and  internal  management 
reports, meeting with an institution’s man-
agement to discuss identified issues, evalu-
ating  applications  to  expand  operations, 
and initiating supervisory enforcement ac-
tions for troubled institutions. The Division 
closely coordinates its supervisory activity 
with the appropriate banking agencies and 
other regulatory bodies. 
Starting in late 2007, faced with sharply 
deteriorating  banking  conditions  in  the   
District Loan Quality Metrics Are Worse Than 
Peaks of Prior Downturn in 1992
4.0
3.0
2.0
1.0
0.0
4.0
3.0
2.0
1.0
0.0
All commercial banks excluding those less than 3 years old;  
averages adjusted for outliers 
Past-Due Loan Rate
 (includes 30-89 day PDs) 
Noncurrent Loan Rate 
3.1
2.3
4.3 4.8
0.80
0.98
0.19
Net Charge-Off Rate
1992  1994  1996  1998  2000  2002  2004  2006  2008
Percent Percent
On Average, District Banks Slipped into the Red in 2008
 1990  1992  1994  1996  1998  2000  2002  2004  2006  2008
  1.4
  1.2
  1.0
  0.8
  0.6
  0.4
  0.2
  0.0
 -0.2
  1.4
  1.2
  1.0
  0.8
  0.6
  0.4
  0.2
  0.0
 -0.2
1.40
1.14
0.53
All commercial banks excluding those less than 3 years old; 
averages adjusted for outliers
Percent Percent
Return on Average Assets
-0.17
Likely first time since the Great Depression
. . . turmoil in financial markets and shaken confidence among depositors created 
funding problems across a broad range of banking organizations, even for those 
without investments in the housing sector.region, the Division made several adjustments 
to the supervisory program. Most significant-
ly, many bank examinations were accelerated 
or  extended  where  problems  were  develop-
ing  rapidly.  Additionally,  supervisory  staff 
intensified activities to complement examina-
tions including enhancing off-site monitoring 
and  real-time  on-site  funding  and  liquidity 
monitoring. Staff also worked closely with the 
FDIC to monitor and develop resolutions for 
troubled banks. In addition, the Division com-
municated to the banking industry the critical 
importance  of  strong  funding  and  liquidity 
risk management and capital planning in the 
current  environment.  Industry  consolida-
tion  resulted  in  another  significant  program 
change, as the largest banking organization in 
the District’s portfolio completed a major ac-
quisition that substantially expanded its pres-
ence across the country.
Implementing Governmental Programs 
to Combat the Financial Crisis
As  a  supervisor  of  banking  organizations, 
the Division is playing a critical role helping 
financial institutions take advantage of Federal 
Reserve and governmental support programs 
during the financial crisis. Such programs in-
clude  not  only  the  Federal  Reserve’s  various 
lending facilities, but also the U.S. Treasury’s 
Troubled  Asset  Relief  Program  (TARP),  the 
FDIC’s  Temporary  Liquidity  Guarantee  Pro-
gram (TLGP), and elements of the Treasury’s 
Financial Stability Plan. 
For TARP, which offers infusions of capital 
to qualified institutions, the Division worked 
on  the  U.S.  Treasury’s  behalf  to  guide  many 
District banking companies through the appli-
cation process. Some received capital in 2008, 
while  processing  continued  for  others  into 
2009.  For  TLGP,  which  provides  the  FDIC’s 
guarantee  on  certain  debt  instruments  and   
non-interest-bearing  transaction  accounts,  the 
Division  counseled  institutions  about  partici-
pation in the program and consulted with the 
FDIC as it reviewed requests for exceptions to 
rules and guarantee limits.
For  the  U.S.  Treasury’s  Financial  Stability 
Plan,  announced  in  February  2009,  Division 
staff  are  participating  in  the  comprehensive 
stress test of the country’s largest banking orga-
nizations. The stress test is intended to enhance 
overall financial stability by ensuring that these 
institutions have enough capital to withstand a 
more severe decline in the economy than pro-
jected. In addition, the Division will support the 
Treasury’s Capital Assistance Program, which 
is expected to be similar to the TARP process 
discussed earlier.
Looking Ahead
As problems that began in the housing sector 
spilled over into the broader economy, so have 
banking  performance  weaknesses  related  to 
housing spread into other lines of bank business 
including  commercial  real  estate,  corporate, 
and consumer lending. Commercial real estate 
weakness is a particular concern for the Twelfth 
District because most banks have lending con-
centrations in that sector. Recessionary effects 
normally  take  some  time  to  work  their  way 
through loan portfolios—and because financial 
markets are not yet fully functioning, the lag 
this time around could be even longer. Going 
forward, the Division will continue to support 
the  banking  industry’s  recovery  by  working 
with individual organizations to address gover-
nance and risk management challenges and by 
facilitating use of policy tools designed to repair 
the financial system. 
20  Federal Reserve Bank of San Francisco Annual Report 2008

A tough year for the banking industry

http://www.frbsf.org/publications/federalreserve/annual/2008/tough_year.pdf

A tough year for the banking industry

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics