Banking is better but still faces challenges.Stability in the banking system has improved since last year, but banks "continue to face significant challenges," according to Senate testimony from Federal Reserve Governor Daniel K. Tarullo. Those challenges include weak credit demand from creditworthy borrowers, risks of "sizable additional credit losses," and vulnerability to deteriorating CRE loans. Tarullo said that 96 percent of community and small regional banks were well capitalized, although weak earnings led to modest declines in average capital ratios over the last year. Nonperforming assets at those institutions rose to 4.4 percent in the second quarter, more than six times higher than "at year-end 2006, before the crisis started." The funding profile at community and small regional banks improved from the Fed's perspective, with core deposit funding rising to 62 percent of assets and brokered deposits and Federal Home Loan Bank advances declining from record highs. .Modifications increase, performing mortgages decline.Loan servicers stepped up the pace of mortgage modifications in the second quarter, implementing 444,000 new home retention actions and tripling the percentage of modifications that reduced principal. The latest Mortgage Metrics report from the OCC and OTS also indicated that delinquencies rose for prime, sub-prime and Alt-A loans, with seriously delinquent (60 or more days past due) loans rising to 5.3 percent of the 34 million loans covered by the report. For the first time the report included data for payment option adjustable rate mortgages, more than 900,000 of which are in the portfolio. These loans performed much worse than the rest of the portfolio, with 15.2 percent classified as seriously delinquent and 10 percent in the process of foreclosure, compared with 5.2 percent for the rest of the portfolio. Overall, 88.6 percent of mortgages in the portfolio were current or performing, a decrease of 1.4 percent since first quarter. .CSBS: policy changes could help community banks.The Conference of State Bank Supervisors asked a Senate subcommittee to help community banks survive the recession by encouraging private capitalization; enabling mergers to resolve problem institutions; revisiting regulatory policies on brokered deposits and prompt corrective action; and changing the viability standard for TARP assistance. Speaking for CSBS, North Carolina Commissioner of Banks Joseph A. Smith Jr., told the subcommittee that TARP has been a "lost opportunity for the federal government to support community and regional banks and provide economic stimulus." Smith said the government has taken unprecedented steps to protect the largest institutions, but has not "treated the rest of the industry with the same expediency, creativity, or fundamental fairness." .Fed sets annual reserve requirements.The first $10.7 million in a bank's net transaction accounts (mostly checking accounts) will be exempt from reserve requirements in 2010, up from $10.3 million in 2009. A reserve ratio of 3 percent will apply to accounts over $10.7 million, up to and including $55.2 million, a rise from $44.4 million in 2009. Accounts over $55.2 million require a 10 percent reserve ratio. The adjustments are based on growth in net transaction accounts and total reservable liabilities between June 30, 2008 and June 30, 2009.
