21 October 2009

US Fed Tarullo: state of the banking industry

The banking industry needs time to work through challenges raised as a result of the crisis and to fully recover. Only then can it serve as a source of strength for the economy. Some positive signals have appeared but caution is still needed.

Tarullo focused on the following issues:

 

·         Conditions in financial markets and the economy have continued to improve in recent months. Pressures in short-term funding markets have eased considerably, broad stock price indexes have increased, risk spreads on corporate bonds have narrowed, and credit default swap spreads for many large bank holding companies, a measure of perceived riskiness, have declined. Despite improvements, stresses remain in financial markets.

 

·         Performance of the banking system. The stability of the banking system has improved since last year. Many financial institutions have been able to raise significant amounts of capital and have achieved greater access to funding. Moreover, through the rigorous Supervisory Capital Assessment Programme (SCAP) stress test conducted by the banking agencies earlier this year, some institutions demonstrated that they have the capacity to withstand more-adverse macro-economic conditions than are expected to develop and have repaid the government's Troubled Asset Relief Programme (TARP) investments.

 

·         Comparative performance of banking institutions by asset size. Although the broad trends detailed above have affected all financial institutions, there are some differences in how the crisis is affecting large financial institutions and more locally-focused community and regional banks. Consider, for example, the 50 largest U.S. bank holding companies which hold more than three-quarters of bank holding company assets and now include the major investment banks in the United States.

 

·         Current conditions in commercial real estate markets. The negative fundamentals in the CRE property markets have caused a sharp deterioration in the credit performance of loans in bank portfolios and loans in commercial mortgage-backed securities (CMBS).

 

·         Federal Reserve activities to help revitalize credit markets. The Federal Reserve, along with other government agencies, has taken a number of actions to strengthen the financial sector and to promote the availability of credit to businesses and households. In addition to aggressively easing monetary policy, the Federal Reserve has established a number of facilities to improve liquidity in financial markets. One such programme is the Term Asset-Backed Securities Loan Facility (TALF), begun in November 2008 to facilitate the extension of credit to households and small businesses.

 

He concluded by saying that “we are working with financial institutions to ensure that they improve their risk-management and capital planning practices, and we are also improving our own supervisory processes in light of key lessons learned. Of course, we are also committed to working with the other banking agencies and the Congress to ensure a strong and stable financial system.”

 

Full speech

 

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