Testifying before the Senate Committee of Banking, Housing and Urban Affairs yesterday, Federal Reserve Bank vice chairman Donald Kohn offered some indications of improvement in the U.S. banking sector, but on the whole painted a somber picture of the short- to mid-term outlook for the industry. Banks have been responding to the economic turmoil touched off by the subprime meltdown last year, he said, but not enough yet. \u201cOver the coming months, we expect banking institutions to continue to face deteriorating loan quality,\u201d Kohn told members of the committee. \u201cHouse prices are still declining sharply in many localities and losses related to residential real estate–including loans to builders and developers–are bound to increase further.\u201d Not only that, he explained, but weak U.S. economic conditions could well extend problems to other kinds of lending portfolios, such as credit card loans, as well as corporate loan portfolios. \u201cBanking organizations must be prepared for the possibility that liquidity conditions [will] become tighter, if uncertainties in the capital markets fail to subside or if credit conditions deteriorate significantly,\u201d Kohn added. \u201cAccordingly, we anticipate that the number of banks with less-than-satisfactory supervisory ratings [i.e., banks in trouble] will continue to increase.\u201d The banking sector isn\u2019t completely on the rocks, he noted, though it hasn\u2019t really bounced back from a very tough fourth quarter 2007, when the 50 largest bank holding companies, which represent more than three-fourths of all bank holding company assets, reported losses totaling more than $9 billion. In the first quarter of 2008, by contrast, the same 50 largest bank holding companies reported profits of $5.2 billion and reduced trading losses. \u201cConsequently, bank holding companies overall reported net income of nearly $10 billion for the quarter, down substantially from the $36.5 billion in income they reported for the first quarter of 2007 but a considerable improvement over the prior quarter’s losses,\u201d Kohn said. But that\u2019s only an aggregate figure. At the bottom of the top 50, there\u2019s still some serious trouble. \u201cSeven of the 50 largest bank holding companies still recorded net losses for the [first quarter of 2008],\u201d Kohl said. \u201cAs economic conditions have softened, these large companies have reported increasing problems in mortgage loan portfolios, particularly home equity lines of credit, and in loans to residential real estate developers\u2026 [and] nonperforming assets more than doubled over the past year from $37 billion to $81 billion and, as of March 31, 2008, nonperforming assets as a share of overall assets reached the highest level since 2002.\u201d The Fed has been pushing banks to bolster their liquidity, and they\u2019ve been doing so, he added. But not by enough. \u201cDespite higher provisioning during the past several quarters, coverage of nonperforming loans by loan loss reserves has not kept pace with growth in problem assets,\u201d Kohl said. \u201cIn view of this uncertain outlook, additional capital injections and the consideration of dividend cuts are still warranted for some of these companies, and we have strongly encouraged supervised bank holding companies to enhance their capital positions.\u201d Kohl, in reflecting on the origins of the current malaise, stressed overconfidence and complacency among the financial institutions themselves, and threw in a note of \u201cwe told you so.\u201d \u201cBefore the recent market turbulence, the Federal Reserve–in many cases along with the other U.S. banking agencies–acted on a number of fronts to alert financial institutions about emerging risks, for example by issuing supervisory guidance on nontraditional mortgages, home equity lending, commercial real estate, and subprime lending,\u201d he said. As for the future role of the Fed in preventing another such risk-spawned financial crisis, Kohl said that \u201cwe are also considering new or augmented supervisory guidance [i.e., new rules] on other aspects of risk management, including further emphasis on the need for an enterprise-wide perspective when assessing and managing risk.\u201d In other words, the Fed wants the left hand to know what the right hand is doing, in terms of banks taking on lending risk. \u201cWe are developing supervisory guidance to clarify expectations surrounding compliance risk, focusing particularly on firm-wide compliance risk management for large, complex organizations,\u201d Kohl said.<\/p>\n","protected":false},"excerpt":{"rendered":"
Testifying before the Senate Committee of Banking, Housing and Urban Affairs yesterday, Federal Reserve Bank vice chairman Donald Kohn offered some indications of improvement in the U.S. banking sector, but on the whole painted a somber picture of the short- to mid-term outlook for the industry. Banks have been responding to the economic turmoil touched…<\/p>\n","protected":false},"author":1314,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[37301],"tags":[],"class_list":["post-1003813439","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"acf":[],"yoast_head":"\n