Banking Supervision and Banking Supervision and RegulationRegulationThe Fed’s Role, New Products and Credit Protection

November 2006

Karen SafleyFederal Reserve Bank of San Francisco

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Manager, Administrative Services Group- Responsibilities include

management of all examination support functions

Experience - Lending Officer/Branch Manager – 10 years- Federal Reserve Bank – 18 years

• 12 years as a Consumer Compliance Examiner FRBSF• 6 years in training/examination support

My BackgroundMy Background

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Banking Supervision:Banking Supervision:Various Regulatory AgenciesVarious Regulatory Agencies

State chartered banks

Nationally chartered banksSavings & Loans

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Federal Reserve SystemFederal Reserve System

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““Fed” Banking SupervisionFed” Banking Supervision

MissionPromote the safety and soundness of the banking system and compliance with laws and regulations

How?Conduct examinations of financial institutions (safety & soundness, regulatory compliance)

Monitor performance and compliance off-site (early-identification of emerging risks)

Process applications (mergers, acquisitions, etc.)

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Monitor credit, market & operational risk; surveillance program; process applications; enforcement

Conduct exams, direct supervision

SF Fed SF Fed -- Banking Supervision DepartmentBanking Supervision Department

Banking Supervision

Support Services Supervision

Int’l & Large Bank Supervision

Regional & Community Bank Supervision

Budget, Communications,Policy

Staff Development /Training

Information & ResourceManagement

Quality Assurance

System Projects

Wells Fargo Supervision

Risk Monitoring & Analysis

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SF Fed’s “Risk Assessment Council”SF Fed’s “Risk Assessment Council”An inside perspective on bank supervisors’ concerns

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280

40

50

100

150

200

250

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Source: FDIC; over 90% of FDIC insured institutions failed between 1980 and 1994

Behind the Failures:

“Boom and bust” cycles & poor lending practices

• Agriculture lending

• Oil price collapse (’80s)

• Commercial real estate & construction lending

• Subprime lending

Annual number of bank failuresOne Reason for Bank Supervisors’ ConcernsOne Reason for Bank Supervisors’ Concerns

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Consumer Lending

Construction / RE Lending

Network & Information

Security

Weak Regional

Economies *

Source: selected areas of concern identified by FRBSF Risk Assessment Council

Regulatory “Radar Screen”Regulatory “Radar Screen”

InterestRate Risk Audit /

Internal Controls /

Fraud

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Real Estate / Real Estate / Construction Lending Construction Lending

Concentrations -high and increasing...

Real Estate Markets – will property values stay strong or bust?

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Consumer Lending Consumer Lending (includes residential & subprime)

Reason for Caution:

Weak economy • high unemployment• high bankruptcy rates• low consumer confidence

High consumer debt

Rapid growth of home loans (e.g. home equity lines)

Potential regional RE market bubbles

Subprime loan risks

“He may not dress well, but he’s never missed a loan payment”

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11.99%

13.22%

250450650850

1,0501,2501,4501,6501,850

'90

'91

'92

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

8%

9%

10%

11%

12%

13%

14%

15%

Source: Federal Reserve Board; American Bankruptcy Inst.

Bankruptcy Filings

Debt service payments / disposable personal incomeNumber of consumer

filings in thousands

Consumer Lending RisksConsumer Lending Risks

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250

500

750

1,000

1,250

1,500

1,750

'90

'91

'92

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

Source: American Bankruptcy Institute

Number of consumer filings in thousands

Bankruptcy FilingsBankruptcy Filings

II. Consumer Lending

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0.0

0.3

0.5

0.8

1.0

1.3

1.5

% o

f Tot

al L

oans

UT WA ID HI OR NV CA AZ

2002 2003 2004

Source: Bank Call Reports – Annual data are for the end of each year

Bank Loan Quality Continues to ImproveBank Loan Quality Continues to ImproveUtah banks have highest noncurrent loan rates, but levels improving rapidly

Median Nonperforming Loan Rates(Past due 90+ days and Nonaccrual)

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Consumer: Residential Lending ConcernsConsumer: Residential Lending Concerns

Causes for Concern:

Rapid growth of home lending, especially home equity lines• Home equity loans “are a

time bomb” *

Potential regional RE market bubbles

* Source of quote: Analyst Richard X. Bove

II. Consumer Lending

Total Residential Loans at 12th District Top Tier BHCs

42 61 93172 194 205

2230

40

5684

105

050

100150200250300350

2000 2001 2002 2003 2004 2005

1st Lien Home Equity + Jr Lien

$ Billions

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5-Year home price index change from June 2000 to 2005 (%)

Rapid home price appreciation in some Rapid home price appreciation in some metro areas metro areas –– sustainable?sustainable?

53%

61%62%

67%84%

87%88%

96%109%

115%118%121%

124%

0% 20% 40% 60% 80% 100% 120% 140%

Nation

TucsonSan Francisco

PhoenixHonoluluMedfordOakland

Las VegasVentura

Los AngelesSan Diego

SacramentoRiverside

II. Consumer Lending

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Conventional Mortgage Loan

Example: per $100,000 at 5%

10 year term 15 year term 30 year term

$1,056 $787 $534 Per Month $126,720 $141,660 $192,240 Full Term

A good example for term comparison is a $500,000 loan at 5%

Compare how much you would pay over the life of the loan.

10 years = $1,267,200

15 years = $2,124,900

30 years = $5,767,200

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Riskier Mortgage LendingRiskier Mortgage LendingOption Arm

Regular Payment

Interest Only

Less than Interest Owed

Payment Power

Minimal Payments

Skip Monthly Payments

Negative Amortization

Home Ownership Accelerator

Mortgage Married to Checking Account

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Interest Only

Single- Family- Mortgage Loans 2004

San Diego 48% (1.2% in 2001)

Atlanta 46%

San Francisco 45%

Denver 43%

Oakland 43%

San Jose 41%

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Consumer: Subprime Lending RisksConsumer: Subprime Lending Risks

12th District

$108 Bill.

Rest of nation

$32 Bill.

SF Fed District’s Subprime Mortgage Lenders Account

for 77% of Originations

II. Consumer Lending

SF Fed District’s Subprime Mortgage Lenders Grew 3 Times Faster Than Nation

$0

$20

$40

$60

$80

$100

$120

1Q'04 1Q'05

12th District Rest of Nation 1Q 2005

$ Bill

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Credit Card DebtCredit Card Debt

The Average American Family owes over $7,000 in credit card debt

Monthly interest charges exceed $105

Making Minimum payments will take 29 years to pay-off this debt

Making Minimum payments ($20) at 18%

- $18,400 will be paid in interest on the $7,000 debt

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Consumer ProtectionConsumer ProtectionIssues:

Predatory Lending• Fair Lending

• Unfair and Deceptive Acts and Practices

Financial Privacy• Identity theft

• Fair and Accurate Credit Transactions (FACT) Act

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V. Network & Information SecurityV. Network & Information SecurityRecent Headlines:

“Third Party Security: Who Can You Trust?”

“Hacker Hits up to 8MM Credit Cards”

“Corporate Losses to CybercrimeIncreasing”

“46.9B is the amount of money lost annually by banks and other financial services providers due to the identity theft.”

“Human Error is Greatest Security Risk”

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Summary: Banking Areas of ConcernSummary: Banking Areas of Concern

Information Security

Consumer Protection

The Federal Reserve Role

Consumer Lending

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Financial Educational Financial Educational -- Web CitesWeb Cites

www.frbsf.org/education/curriculum/index.html

www.fdic.gov/consumers/consumer/moneysmart/index.html

www.mymoney.gov

www.thirteen.org/edonline/

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Credit Reporting Credit Reporting -- Web CitesWeb Cites

www.Experian.com

www.Transunion.com

www.Equifax.com

www.annualcreditreport.com

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Questions & AnswersQuestions & Answers