Foundation for Accounting Education

1
Current Regulatory Issues

• Foundation for Accounting Education
• 2008 Banking Conference
• September 25, 2008

James C. Watkins Deputy Regional Director FDIC,
New York Region
2
Examination Trends

• Commercial Real Estate
• Growth in CRE and CD Concentrations
• Concurrent Asset Quality Deterioration
• Funding Pressures
• Reliance on Brokered Deposits
• Absence of Contingency Planning

3
CRE Concentrations Continue to Rise Despite
Deteriorating Market Conditions
of Institutions with CRE Concentrations
gt 600
gt 500 to 600
gt 400 to 500
gt 300 to 400
4
Higher Risk CD Concentrations Have Grown Even
More Rapidly
of Institutions with CD Concentrations
gt 300
gt 200 to 300
gt 100 to 200
5
Banks Concentrated in CD Lending are Evidencing
Higher Levels of Deterioration
Median Past Due CD Loans () by Concentration
Level
gt 300
gt 100 to 200
gt 100 to 200
Less than 100 0
6
Banks in Southeast and West Tend to have Higher
CRE Concentrations
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And the Highest Delinquency Ratios
8
What Examiners are Seeing

• Inappropriate Use of Interest Reserves
• Inadequate Financial Analysis
• Inadequate Loan Loss Reserves
• Inadequate Valuations

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Percent of Assets Funded by Core Deposits at
FDIC-Insured Institutions
11
Brokered Deposit Reliance Could Become an Issue
for Some Banks
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What Examiners are Seeing

• Failure of banks to understand definitions of a
  brokered deposit
• If a Bank is less than Well Capitalized
• it must seek a waiver to accept, roll-over or
  renew brokered deposits and
• it is by definition a deposit broker, so deposit
  rate limits kick in for ALL of the banks
  deposits.
• If a Bank is less than Adequately Capitalized, it
  may not accept, roll-over or renew brokered
  deposits.

13
What Examiners are Seeing

• Failure of bank liquidity contingency plans to
  consider that
• Lenders may impose higher haircuts, reduced
  durations, higher rates, or limits on eligible
  collateral as asset quality deteriorates
• Correspondent banks may terminate relationships
  as overall financial condition deteriorates and
• Systemic shocks can cause entire asset classes to
  become illiquid (certain MBS) and entire classes
  of funding sources to become unattractive (ABCP
  and securitizations).

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Closing Comments

• Questions?