banking supervision and regulation
TRANSCRIPT
Banking Supervision and Banking Supervision and RegulationRegulationThe Fed’s Role, New Products and Credit Protection
November 2006
Karen SafleyFederal Reserve Bank of San Francisco
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Manager, Administrative Services Group- Responsibilities include
management of all examination support functions
Experience - Lending Officer/Branch Manager – 10 years- Federal Reserve Bank – 18 years
• 12 years as a Consumer Compliance Examiner FRBSF• 6 years in training/examination support
My BackgroundMy Background
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Banking Supervision:Banking Supervision:Various Regulatory AgenciesVarious Regulatory Agencies
State chartered banks
Nationally chartered banksSavings & Loans
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Federal Reserve SystemFederal Reserve System
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““Fed” Banking SupervisionFed” Banking Supervision
MissionPromote the safety and soundness of the banking system and compliance with laws and regulations
How?Conduct examinations of financial institutions (safety & soundness, regulatory compliance)
Monitor performance and compliance off-site (early-identification of emerging risks)
Process applications (mergers, acquisitions, etc.)
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Monitor credit, market & operational risk; surveillance program; process applications; enforcement
Conduct exams, direct supervision
SF Fed SF Fed -- Banking Supervision DepartmentBanking Supervision Department
Banking Supervision
Support Services Supervision
Int’l & Large Bank Supervision
Regional & Community Bank Supervision
Budget, Communications,Policy
Staff Development /Training
Information & ResourceManagement
Quality Assurance
System Projects
Wells Fargo Supervision
Risk Monitoring & Analysis
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SF Fed’s “Risk Assessment Council”SF Fed’s “Risk Assessment Council”An inside perspective on bank supervisors’ concerns
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280
40
50
100
150
200
250
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Source: FDIC; over 90% of FDIC insured institutions failed between 1980 and 1994
Behind the Failures:
“Boom and bust” cycles & poor lending practices
• Agriculture lending
• Oil price collapse (’80s)
• Commercial real estate & construction lending
• Subprime lending
Annual number of bank failuresOne Reason for Bank Supervisors’ ConcernsOne Reason for Bank Supervisors’ Concerns
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Consumer Lending
Construction / RE Lending
Network & Information
Security
Weak Regional
Economies *
Source: selected areas of concern identified by FRBSF Risk Assessment Council
Regulatory “Radar Screen”Regulatory “Radar Screen”
InterestRate Risk Audit /
Internal Controls /
Fraud
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Real Estate / Real Estate / Construction Lending Construction Lending
Concentrations -high and increasing...
Real Estate Markets – will property values stay strong or bust?
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Consumer Lending Consumer Lending (includes residential & subprime)
Reason for Caution:
Weak economy • high unemployment• high bankruptcy rates• low consumer confidence
High consumer debt
Rapid growth of home loans (e.g. home equity lines)
Potential regional RE market bubbles
Subprime loan risks
“He may not dress well, but he’s never missed a loan payment”
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11.99%
13.22%
250450650850
1,0501,2501,4501,6501,850
'90
'91
'92
'93
'94
'95
'96
'97
'98
'99
'00
'01
'02
'03
8%
9%
10%
11%
12%
13%
14%
15%
Source: Federal Reserve Board; American Bankruptcy Inst.
Bankruptcy Filings
Debt service payments / disposable personal incomeNumber of consumer
filings in thousands
Consumer Lending RisksConsumer Lending Risks
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250
500
750
1,000
1,250
1,500
1,750
'90
'91
'92
'93
'94
'95
'96
'97
'98
'99
'00
'01
'02
'03
'04
Source: American Bankruptcy Institute
Number of consumer filings in thousands
Bankruptcy FilingsBankruptcy Filings
II. Consumer Lending
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0.0
0.3
0.5
0.8
1.0
1.3
1.5
% o
f Tot
al L
oans
UT WA ID HI OR NV CA AZ
2002 2003 2004
Source: Bank Call Reports – Annual data are for the end of each year
Bank Loan Quality Continues to ImproveBank Loan Quality Continues to ImproveUtah banks have highest noncurrent loan rates, but levels improving rapidly
Median Nonperforming Loan Rates(Past due 90+ days and Nonaccrual)
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Consumer: Residential Lending ConcernsConsumer: Residential Lending Concerns
Causes for Concern:
Rapid growth of home lending, especially home equity lines• Home equity loans “are a
time bomb” *
Potential regional RE market bubbles
* Source of quote: Analyst Richard X. Bove
II. Consumer Lending
Total Residential Loans at 12th District Top Tier BHCs
42 61 93172 194 205
2230
40
5684
105
050
100150200250300350
2000 2001 2002 2003 2004 2005
1st Lien Home Equity + Jr Lien
$ Billions
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5-Year home price index change from June 2000 to 2005 (%)
Rapid home price appreciation in some Rapid home price appreciation in some metro areas metro areas –– sustainable?sustainable?
53%
61%62%
67%84%
87%88%
96%109%
115%118%121%
124%
0% 20% 40% 60% 80% 100% 120% 140%
Nation
TucsonSan Francisco
PhoenixHonoluluMedfordOakland
Las VegasVentura
Los AngelesSan Diego
SacramentoRiverside
II. Consumer Lending
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Conventional Mortgage Loan
Example: per $100,000 at 5%
10 year term 15 year term 30 year term
$1,056 $787 $534 Per Month $126,720 $141,660 $192,240 Full Term
A good example for term comparison is a $500,000 loan at 5%
Compare how much you would pay over the life of the loan.
10 years = $1,267,200
15 years = $2,124,900
30 years = $5,767,200
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Riskier Mortgage LendingRiskier Mortgage LendingOption Arm
Regular Payment
Interest Only
Less than Interest Owed
Payment Power
Minimal Payments
Skip Monthly Payments
Negative Amortization
Home Ownership Accelerator
Mortgage Married to Checking Account
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Interest Only
Single- Family- Mortgage Loans 2004
San Diego 48% (1.2% in 2001)
Atlanta 46%
San Francisco 45%
Denver 43%
Oakland 43%
San Jose 41%
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Consumer: Subprime Lending RisksConsumer: Subprime Lending Risks
12th District
$108 Bill.
Rest of nation
$32 Bill.
SF Fed District’s Subprime Mortgage Lenders Account
for 77% of Originations
II. Consumer Lending
SF Fed District’s Subprime Mortgage Lenders Grew 3 Times Faster Than Nation
$0
$20
$40
$60
$80
$100
$120
1Q'04 1Q'05
12th District Rest of Nation 1Q 2005
$ Bill
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Credit Card DebtCredit Card Debt
The Average American Family owes over $7,000 in credit card debt
Monthly interest charges exceed $105
Making Minimum payments will take 29 years to pay-off this debt
Making Minimum payments ($20) at 18%
- $18,400 will be paid in interest on the $7,000 debt
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Consumer ProtectionConsumer ProtectionIssues:
Predatory Lending• Fair Lending
• Unfair and Deceptive Acts and Practices
Financial Privacy• Identity theft
• Fair and Accurate Credit Transactions (FACT) Act
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V. Network & Information SecurityV. Network & Information SecurityRecent Headlines:
“Third Party Security: Who Can You Trust?”
“Hacker Hits up to 8MM Credit Cards”
“Corporate Losses to CybercrimeIncreasing”
“46.9B is the amount of money lost annually by banks and other financial services providers due to the identity theft.”
“Human Error is Greatest Security Risk”
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Summary: Banking Areas of ConcernSummary: Banking Areas of Concern
Information Security
Consumer Protection
The Federal Reserve Role
Consumer Lending
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Financial Educational Financial Educational -- Web CitesWeb Cites
www.frbsf.org/education/curriculum/index.html
www.fdic.gov/consumers/consumer/moneysmart/index.html
www.mymoney.gov
www.thirteen.org/edonline/
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Credit Reporting Credit Reporting -- Web CitesWeb Cites
www.Experian.com
www.Transunion.com
www.Equifax.com
www.annualcreditreport.com
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Questions & AnswersQuestions & Answers