Arkansas. By Julie L. Stackhouse, Senior Vice President Federal Reserve Bank of St. Louis. October 29, 2009

Transcription

1 FEDERAL RESERVE BANK of ST. LOUIS CENTRAL to AMERICA S ECONOMY TM The State t of Banking in Arkansas Prepared for the Arkansas State Economic Forecast Conference By Julie L. Stackhouse, Senior Vice President Federal Reserve Bank of St. Louis October 29,

2 Just over a year ago Source: Reuters.com 2

3 The country faced a financial crisis LIBOR OIS Spreads Percentage Points Fall Before the Problems Month 3 Month 3

4 The Federal Reserve, the U.S. Government, and the Federal Deposit Insurance Corporation all responded. Federal Reserve Provided funds (liquidity) to stabilize financial markets First Responders to the financial crisis United States Government Funded the Troubled Asset Relief Program and the $800 billion economic stimulus Federal Deposit Insurance Corporation Raised bank deposit insurance limits and provided other bank debt guarantees 4

5 A picture of the Fed s actions. 2,500,000 Federal Reserve Actions in $ millions 2,000,000 1,500,000 1,000, , Jan 07 3 Apr 07 3 Jul 07 3 Oct 07 3 Jan 08 3 Apr 08 3 Jul 08 3 Oct 08 3 Jan 09 3 Apr 09 3 Jul 09 3 Oct 09 Traditional Security Holdings Securities Lent to Dealers Repurchase Agreements Other Fed Assets Currency Swaps Term Auction Credit Primary/Other Broker Dealer Primary Credit Secondary Credit Seasonal Credit Maiden Lane 1 Maiden Lane 2 Maiden Lane 3 Asset Backed Commercial Paper Net Portfolio Holdings Comm Paper Other Credit Credit to AIG Mortgage backed Securities Federal Agency Debt Securities Term Asset Backed Securities 5

6 Congress responded with the Troubled Asset Relief Program. Utilization of TARP Funds October 7, 2009 Capital Purchase Program (CPP) - $204.6 billion less $70.7 billion repaid (690 institutions initially; now 650 institutions) $133.9 billion Capital Assistance Program (CAP) $0 Consumer and Business Lending Initiative (Super TALF) $20 billion in LLC Public-Private Investment Program (P-PIP) Legacy Assets $16.7 billion Targeted Investment Program (TIP) Citi, BoA $40 billion Asset Guarantee Program - Citi $5 billion Auto Industry/Auto Supplier Program GM, GMAC, and Chrysler Systemically Significant Failing Institutions - AIG $83.5 billion invested $2.1 billion repaid $69.8 billion Affordable Housing Support and Foreclosure Prevention (Making Homes Affordable Program) 64 servicers; incentive caps of $27.2 billion Source: 6

7 The Federal Deposit Insurance Corporation responded with higher levels of insurance. Federal Deposit Insurance coverage increased to $250,000 per owner through December 31, 2013 (Beginning May 2008) Banks also had the option to pay a fee to participate in two other temporary programs beginning November 2008: - Full insurance of noninterest demand accounts in excess of $250,000 - Guarantee of certain newly-issued senior unsecured debt of banking organizations Separate from the FDIC program, the Treasury temporarily guaranteed participating money market mutual funds until September 19,

8 The financial crisis and recession spilled over into the banking system. Return on Assets Non Performing Loans/Total Loans Loan Loss Reserve/Non Performing Loans Tier 1 Leverage Ratio CRE / Total Loans 6/30/ /31/2008 6/30/ /31/2008 6/30/ /31/2008 6/30/ /31/2008 6/30/ /31/2008 Banks/thrifts > $100 billion Banks/thrifts $15 $ billion Banks/thrifts $1 $ billion Banks/thrifts < $1 billion Source: Reports of Condition and Income 8

9 Banks and thrifts in Arkansas have experienced some stress as well. Return on Assets Non Performing Loans/Total Loans Loan Loss Reserve/Non Performing Loans Tier 1 Leverage Ratio CRE / Total Loans 6/30/ /31/2008 6/30/ /31/2008 6/30/ /31/2008 6/30/ /31/2008 6/30/ /31/2008 Banks/thrifts $15 billion or less Arkansas HQ banks /thrifts $15 B or less Fayetteville headquartered banks/thrifts Little Rockheadquartered banks/thrifts Source: Reports of Condition and Income and OTS Reports 9

10 The driver has been commercial real estate (CRE). Banks have significant exposure to CRE. Totals ($ Billions) & Delinquency Rates (%) $ % $703 $1, % Commercial Banks CMBS $872 Insurance Companies 1.85% Other Source: CMSA, Flow of Funds Accounts 1 st & 2 nd Quarter

11 Relative to size, smaller community and regional banks are more exposed to commercial real estate percent % of Loans % of Risk Based Capital Large ($50B+) Regional ($10 50B) Community Missouri Banks Source: Reports of Condition and Income 2 nd Quarter

12 CRE risks are widespread. June 30, 2009 Group/Asset Class CRE Loans/Total Loans Nonperforming CRE Loans/Total CRE Loans CRE Net Chargeoffs/CRE Loans All US banks/thrifts < $15 billion All Arkansas banks/thrifts < $15 billion All US banks/thrifts < $1 billion All Arkansas banks/thrifts < $ billion Source: Call Reports and OTS Reports 12

13 A look at Arkansas metro areas as compared to other regional MSAs. June 30, 2009 MSA CRE Loans/Total Loans Nonperforming CRE Loans/Total CRE Loans CRE Net Chargeoffs/CRE Loans Fayetteville 33.42% 4.75% 0.53% Little Rock 44.34% 5.06% 2.04% Memphis 26.37% 5.75% 2.65% Springfield, MO 33.07% 3.19% 1.17% St. Louis 37.06% 5.76% 1.8% 13

14 Understanding the valuation problem. Change in Cap Rate Long-Term Average Change in NOI 6.50% 7.50% 8.50% 9.50% 10.50% Cash Flow Flat Value 15, , , , , Change in V from Baseline -13.3% -23.5% -31.6% -38.1% Cash Flow Down 10% Value 13, , , , , Change in V from Baseline -10.0% -22.0% -31.2% -38.4% -44.3% Cash Flow Down 20% Value 12, , , , , Change in V from Baseline -20.0% -30.7% -38.8% -45.3% -50.5% Source: Blackrock and Atlanta FRB 14

15 Real estate loan write-offs tend to lag economic performance. Percent Real-Estate Loan Charge-Off Rate At All Insured Comml Banks Percent (seasonally adjusted annual rate; left scale)) Economic Growth: Quarterly Change in Real GDP Percent (seasonally adjusted annual rate; right scale)) Percent Periods of economic recession are denoted by vertical gray bars Sources: FRB, BEA /Haver Sources: Federal Reserve Board and Bureau of Economic Analysis. Quarterly data through Q

16 As write-offs have grown, so have bank failures Total Number of Failed Banks and Thrifts Source: FDIC; data as of 10/23/

17 When put into constant terms, it appears that assets of failed banks will exceed the 1980s. 350 Failed Assets by Month in September 2009 Dollars

18 Yet, FDIC statistics tell only part of the story. Institution Qtr that distress/failure occurred TA as of the quarter listed (in $ bln) Bear Stearns Q AIG Q Merrill Lynch Q Fannie Mae Q Wachovia Q Freddie Mac Q Lehman Brothers Q Citi Q Bank of America Q GMAC Q National City Q

19 While the FDIC has accelerated the pace of resolutions, the insurance fund is under pressure FDIC Reserve Ratio DIF Balance to Total Insured Deposits (%) Reserve Ratio Pre Crisis ii Reserve Ratio Avg 19

20 In Conclusion Income producing property loans pose a considerable risk to banks as we move into Failures among commercial banks and thrifts will continue, even as the economy recovers. However, the resolution mechanism for community and regional banks is strong, although it is facing substantial strain. Banking organizations with strong capital and risk management practices will weather the storm and stand well-positioned for the future. 20

21 Questions? 21