New "ViewPoint" Examines Banking Conditions, Regulatory Updates

June 30, 2021

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

It seems impossible that we are at the midpoint of 2021! Banking conditions have certainly improved since this time last year, when firms were reporting skyrocketing levels of provisions in preparation for what was expected to be a period of deteriorating credit quality as a result of COVID-19. Contrary to initial expectations (including mine), credit conditions have stood up well and more recently improved, thanks, in part, to government support and robust loan-modification programs. Although we hope that we have seen the worst of COVID-19, uncertainty persists about the course of the pandemic, including the implications of ending the many support initiatives. So firms must continue to closely monitor affected borrowers and be prepared to pivot as needed, depending on shifting conditions.

As always, this edition of "ViewPoint" includes a review of financial conditions in Sixth District institutions, as well as information about upcoming events and recent regulatory announcements. In addition, an article on the transition from LIBOR to an alternative reference rate will be published in the next quarter. As time is fast approaching for the cessation of LIBOR, preparation for this complicated change is critically important to the industry and high on the radar screen of all financial regulatory authorities.

State of the District
In the first quarter, most banks reported stable to improving financial performance. The median return on average assets (ROAA) increased from 0.97 percent in the fourth quarter of 2020 to 1.06 percent in the first quarter of 2021, approaching the 1.10 percent level last seen in the first quarter of 2019. Reductions in provision expenses drove the improvement in ROAA, especially at many larger community banks. However, about 65 percent of banks reported a decline in the net interest margin (NIM) in the first quarter of 2021, continuing an ongoing trend over the last five quarters, linked to low interest rates and weak loan demand. Improving NIM will continue to be a challenge as this environment persists, especially following the temporary boost that PPP lending provided.

The majority of banks in the District reported satisfactory asset quality, as loan modifications declined and most borrowers appeared to be performing as expected. Nonperforming loans (loans past due 90 days or more and nonaccrual loans) have declined to their lowest level since before the financial crisis in 2008. However, as the last modifications and forbearance arrangements end, a moderate amount of deterioration could occur.

Spotlight article: Preparing for the transition from LIBOR
The transition from LIBOR continues to be a hot topic and has gained even more urgency given final announcements about the planned cessation of the production of some U.S. dollar LIBOR rates at the end of this year, with remaining rates ceasing production in mid-2023. It is imperative that banks immediately halt entering into loan agreements referring to LIBOR and take steps to adopt fallback language in existing contracts. Failure to prepare for this transition by December 31, 2021, will result in supervisory criticism. Check back here for our Spotlight article with additional information.

Outreach events
The Atlanta Fed's Supervision, Regulation, and Credit (SRC) Division has begun a real estate webinar series featuring our residential and commercial real estate experts sharing their market insights, industry perspectives, and data analytics and tools. The first webinar, presented on June 22, featured Domonic Purviance, residential real estate subject matter expert, who discussed current conditions and trends in residential real estate as well as the potential risks that lie ahead as the market emerges from COVID's impact. In light of concerns about the decline in home ownership affordability, he also demonstrated the Atlanta Fed's Home Ownership Affordability Monitor (HOAM) tool, which allows users to track changes in home ownership affordability for median-income households. You can subscribe to receive HOAM update alerts. You can view a recording of this webinar and previous ViewPoint webinars on our Federal Reserve Supervision page by clicking on "ViewPoint Webinar Series."

Supervision and regulation update
See below for information on final rules and proposals from the second quarter. Note that the comment periods on the proposals end in July. You can find additional details on recent announcements regarding Supervision and Regulation on the website of the Board of Governors.

  • On June 24, the Federal Reserve Board released results of its bank stress tests. All 23 large banks included in the test remained well above their risk-based minimum capital requirements and could continue lending to households and businesses during a severe recession.
  • On May 7, the Federal Reserve Board invited public comment on proposed changes to Regulation II (debit card interchange fees and routing), clarifying that debit card issuers should enable—and allow merchants to choose from—at least two unaffiliated networks for card-not-present debit card transactions, such as online purchases. The comment period ends on July 12, 2021.
  • Relatedly, as the Electronic Fund Transfer Act requires, the Board published a biennial report in May containing summary information on debit card transactions in 2019.
  • On May 5, the Federal Reserve Board invited public comment on proposed guidelines to evaluate requests for accounts and payment services at Federal Reserve Banks ("Account Access Guidelines"). In recent years, institutions with novel types of banking charters designed to support innovation have requested access to the payments system that Federal Reserve Banks offer. To help achieve the goal of applying a transparent and consistent process for all access requests (as well as considering the ramifications for the broader financial system), the Board is proposing account access guidelines for the Reserve Banks to evaluate such requests. These guidelines consider the Board's legal authority and reflect an analysis of its policy goals. The comment period ends on July 12, 2021.
  • On April 22, 2021,the agencies invited comment on a proposed rule for income tax allocation agreements, which updates and codifies existing guidance on income tax allocation agreements involving depository institutions and their affiliates. Under the proposed rule, banks that file tax returns as part of a consolidated tax filing group would be required to enter into tax allocation agreements with their holding companies and other members of their consolidated group. The proposed rule also describes the provisions required to be included in those agreements and specifies regulatory reporting treatment. The comment period ends July 9, 2021.

In closing, this is likely my last "ViewPoint" message, as I plan to retire. My last working day is scheduled for September 30. It has been my privilege and honor to work for the Federal Reserve for more than 30 years, with the last 11 years here at the Federal Reserve Bank of Atlanta.

During my tenure here in Atlanta, I have had the opportunity to learn about your institutions and work with many of you through some difficult and challenging times. When I arrived in 2010, the industry was suffering through the dark days of the Great Recession. Since then, industry risk management practices and the supervision and regulation framework have both improved substantially and, I believe, enabled us to work as partners to manage a time of tremendous upheaval and uncertainty arising from the pandemic. The speed with which the industry pivoted to continue to serve customers and protect staff, and the quick actions of financial regulators to adjust supervisory expectations, were critical to maintaining stability through this most unusual period. It is certainly a sea change from the prior crisis, and it’s one from which we all can learn and be proud of.

In the next few months, I will be actively engaged with developments in the District and working to ensure a smooth transition for my successor. During this time, please feel free to contact me at As always, I welcome the opportunity to talk with you about your firms and the industry. I am confident that, in my absence, the Division’s experienced senior leadership team will continue to provide excellent supervision and strong communications, with an emphasis on transparency and agility as is necessary for these "interesting" times.

In closing, I wish you all continued success and good health!

photo of Michael Johnson
Michael E. Johnson

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