Banking Conditions, Regulatory Updates Discussed in New "ViewPoint"

January 8, 2021

By Michael Johnson, Executive Vice President
Supervision, Regulation, and Credit
Federal Reserve Bank of Atlanta

In the midst of the pandemic and horrific social unrest that will forever mark 2020 and now the beginning of 2021, the Fed remains committed to pursuing its mandates by supporting the economy and working with the banking industry to maintain the flow of credit to businesses and consumers. You can see more information on our response to the economic and financial stresses resulting from the pandemic in the Board’s most recent Supervision and Regulation Report, which was coordinated in conjunction with semiannual testimony before Congress by Randal Quarles, the Fed’s vice chair for supervision. The latest edition of Community Banking Connections discusses the Fed’s strategic themes that define our approach to supervision, which were developed before the pandemic but remain appropriate during this period. Below, I provide a brief overview of fourth-quarter events in supervision and regulation.

I’d like to reiterate that open communication with the industry remains our top priority during these dynamic times. Your feedback informs our response to the pandemic, and our door is always open! Several outreach efforts are under way, including a Supervisory Update – Navigating the Current Environment, to be held on Zoom on January 14. It will feature officers and staff from Atlanta’s Supervision, Regulation, and Credit Division. Our annual Banking Outlook Conference is also coming up at the end of February. You can find details on these events and more below. First, as always, we take a look at the State of the District.

The State of the District
In the third quarter, the median return on average assets was 0.97 percent, nearly identical to the prior two quarters but down 23 basis points from the third quarter of 2019. A majority of Sixth District banks reported lower net interest margins, continuing a four-quarter trend. Facing continued margin compression and economic uncertainty, bankers are looking for opportunities to reduce expenses.

Third-quarter asset quality metrics appeared healthy as borrowers continued to benefit from forbearance, federal stimulus programs, or both. Accommodations granted early in the pandemic began expiring in September, and initial reports indicate that payments on many loans have resumed as expected. The majority of loans that remain in forbearance are commercial real estate mortgages, with a significant portion belonging to hotel and retail borrowers, two of the hardest-hit commercial property sectors. As loans transition from forbearance, we expect overall financial conditions will become clearer.

Capital ratios remained at satisfactory levels at most community banks within the Sixth District through the third quarter. The median on-hand liquidity ratio among community banks in the District rose to 23.5 percent, the highest level since March 2013. Investments in shorter-term instruments have risen as bankers are reluctant to lock in for the longer term given low rates, ongoing uncertainty, and concerns about the “stickiness” of pandemic deposits.

A cautionary note: As forbearance periods end, lenders must be mindful of complying with the CARES Act’s consumer protection provisions, which were implemented quickly and, as a result, may be outside the scope of usual risk management practices.

Supervision & Regulation Update
Following are a few highlights from the fourth quarter of 2020 (look for additional information in an upcoming “Spotlight” article on the state of supervision, which will be published later this quarter):

  • On December 15, 2020, the Board announced it has become a member of the Network of Central Banks and Supervisors for Greening the Financial System. The network brings together central banks and supervisory authorities from around the world to exchange ideas, research, and best practices on the development of environment and climate risk management for the financial sector.
  • On November 30, 2020, the Federal Reserve announced its support for a proposal and supervisory statements that would enable a clear end date for U.S. Dollar (USD) LIBOR that would promote the safety and soundness of the financial system. The proposal lays out a path to permit banks to transition to an alternative reference rate in orderly fashion. Under the proposal, banks would stop writing new USD LIBOR contracts by the end of 2021, and most legacy contracts would be allowed to mature before LIBOR stopped.
  • On October 29, 2020, supervisory agencies proposed a regulation on supervisory guidance that would codify existing practice. Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions or issue supervisory criticisms based on noncompliance with supervisory guidance.

Upcoming Outreach Events

  • Artificial Intelligence Symposium, Tuesday, January 12, and Wednesday, January 13 (virtual)
    The Federal Reserve Board will host a symposium on artificial intelligence (AI) and its use in banking. Participants will discuss key issues related to the use of AI in banking, including challenges associated with transparency and fairness. The link above gives additional information on the agenda and registration.
  • Supervisory Update: Navigating the Current Environment, Thursday, January 14, 9–11 a.m. EST (virtual via Zoom)
    Mike Johnson, executive vice president of the Supervision, Regulation, and Credit (SRC) Division; Steve Wise, vice president of SRC’s Community and Regional Group; and Sue Costello, SRC’s vice president of applications and consumer affairs, will provide an update on supervision and participate in a Q&A session. Additionally, subject matter experts will cover hot topics such as commercial real estate, problem loan accounting, and operational risk.
  • 2021 Banking Outlook Conference—Updates among Uncertainty: Where Do We Go from Here?, Thursday, February 25, 8:30 a.m.–3:30 p.m. EST (virtual via WebEx)
    This annual event brings together bank supervisors and industry participants to examine and discuss challenges confronting the financial services industry. Randal Quarles, the Fed’s vice chair for supervision, will deliver the keynote address. We look forward to sharing updates on the economy, commercial and residential real estate, and CECL implementation. The conference will also include a panel discussion on the outlook for banking in 2021. Please email any questions to

Safer Payments Innovation
Promoting safer payments innovation is one of the Federal Reserve Bank of Atlanta’s strategic priorities. The Supervision, Regulation, and Credit Division is working closely with other divisions and external partners, such as fintechs and financial institutions, to enhance the integrity and resilience of the payments ecosystem. A recent white paper, Digital Payments and the Path to Financial Inclusion, considers alternative payment options for cash users who are excluded from the digital payments landscape.

The State of Cybersecurity: Regulators' Perspective
This ViewPoint Live webinar covers how the pandemic has affected cybersecurity risks for financial institutions. A team of cybersecurity specialists from the Federal Reserve Bank of Atlanta's Supervision, Regulation, and Credit Division will discuss the supervisory approach to cybersecurity, key considerations learned during the pandemic, and emerging trends financial institutions should reflect on as we navigate into the future.

In conclusion, I encourage you to hang in there! I look forward to continuing to work with you as we manage through this extremely unusual period. Please feel free to reach out at any time to Best wishes for a healthy and productive new year!

photo of Michael Johnson
Michael E. Johnson

Executive Vice President, Supervision & Regulation
The Federal Reserve Bank of Atlanta