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Financial Industry Perspectives

Financial Industry Perspectives contains articles by the Supervision and Risk Management Division on a variety of banking issues and topics.

2005

  • Home Financing for Low- and Moderate-Income Borrowers: What Are the Trends in Denver?

    By James Harvey and Kenneth Spong
    Over the last decade, many significant developments have influenced home lending. Among these developments are the longest expansion period in U.S. history, pathbreaking technological and financial innovations, new regulatory and legislative incentives for low- and moderate-income lending, and continued growth of community organizations and special home lending programs.

    This article takes a look at these trends and their possible effect on home purchase lending in the Denver metropolitan area between 1992 and 2002. The article examines changes in home financing across the entire metropolitan area, as well as among low- and moderate-income borrowers and within low- and moderate-income neighborhoods. Also analyzed are the contributions of different types of lenders banks and thrifts with local banking offices, banks and thrifts with no Denver banking offices, and independent mortgage companies.

    Among the more noteworthy findings in this analysis is the substantial growth that has occurred in home purchase lending for the entire Denver metropolitan area, with a rising share of this lending going to low- and moderate-income borrowers and neighborhoods. Of further interest is the growing importance of home lending by banking organizations without deposit-taking offices in Denver. In particular, the rapid emergence of such organizations in low- and moderate-income lending provides a strong signal that this lending is meeting many of the same market tests as other forms of lending, thus foreshadowing a more continuous flow of financing to lower income neighborhoods.

  • Credit Union Growth in the Tenth Federal Reserve District: How Legal and Regulatory Changes Have Affected Credit Union Expansion

    By Eric Robbins
    In the Tenth Federal Reserve District, banks have reported increasing concern regarding deposit competition from credit unions. In our 2004 Survey of Community Banks, we asked banks to rate competition from a variety of sources. Bankers said they anticipate intense competition from several sources in the coming years. Foremost is competition from other community banks. However, almost half of all community banks that responded said they expect very intense or intense deposit competition from credit unions in the next five years. What factors lead bankers to believe that competition from credit unions is increasing? This article seeks to address this question by describing the credit union industry and the historical basis for legal and regulatory differences between banking and credit union supervision and regulation, as well as recent legal and regulatory changes that may have increased competition between credit unions and banks. The article will show how these changes are affecting credit unions located in the Tenth District states.

2004

  • From the Mountains to the Prairies: The Banking Environment in the Tenth Federal Reserve District

    By David Klose
    The Tenth Federal Reserve District consists of many types of markets within which District institutions operate. Since conditions in the District environment can vary from dynamic to slow-growing, these markets offer both challenge and opportunity that financial institutions must understand to be successful. But what is the level of change in the District environment and how might that change be materializing? This article considers the environment within the Tenth District and discernible trends within that environment. We highlight the major factors that influence bank behavior and condition, including demographic, economic and structural conditions and trends. The 2000 census information is used in conjunction with that of prior census surveys to describe where the District is today and from where it has evolved demographically. Economic data, including gross state product information, allows us to report the shifts in industrial focus for various markets and the District as a whole. The article also considers changes in the industry and describes how banking consolidation has evolved within the District. Finally, the article looks at potential future trends, to shed light on emerging environmental factors of which District banks may take into account in their planning process.

  • The 2004 Survey of Community Banks in the Tenth District

    By Forest Myers and Eric Robbins
    Periodically, the Federal Reserve Bank of Kansas City surveys Tenth District bankers for their views on a variety of matters. In February 2004, we solicited banker opinion on a number of topics pertaining to governance and staffing practices, vendor management practices, competitive environment and future prospects, interest rate risk management practices, internet banking services, and payments system issues. This article briefly sets out the survey methodology and describes the applicability of survey results to the entire population of District banks. It also reviews what bankers told us about their environment, competition, and future challenges. Broadly speaking, survey results can be generalized for all Tenth District banks. The representative community bank in the District has assets less than $150 million, is family-owned and locally controlled, and is headquartered outside a metropolitan area. The economic and competitive environment these banks face depends, in part, on growth prospects and diversification opportunities within their communities. Their most intense loan and deposit competitors are other community banks. Their greatest challenges involve basic aspects of successfully managing a bank: funding, income sources, and meeting competition. Despite identifying many problems, all but a few bankers expect their banks will remain in business and succeed.

    Note: Much of the content in the 2004 issue of Financial Industry Perspectives is based on a survey of community banks. The survey itself is not included in Financial Industry Perspectives, but a complete copy, along with statistical summaries of responses, is available in Summary Results--Survey of Community Banks in the Tenth Federal Reserve District. For survey results of states whose sample was sufficient to publish separately click here.

  • Technology Outsourcing: A Community Bank Perspective

    By Eric Robbins and Joe Van Walleghem
    This article provides an overview of the technology industry that has evolved to provide technology outsourcing services for community banks, and the risk management issues associated with outsourcing. The service provider industry is in a transition phase being brought about by changing economic fundamentals in banking and in information technology. These factors have contributed to significant consolidation among the technology companies that serve the banking industry, especially among technology firms offering core processing services. Accordingly, the array of firms serving the national and regional markets has changed significantly. The increasing reliance of banks on technology service providers to support core bank processes has led to heightened attention on the risks of new technologies. Awareness of the growing importance of these risks has led to development of a standardized framework for managing the risks related to technology outsourcing. Survey results that point to practices most widely followed by community banks are used to highlight current practices and regulatory guidance for managing technology risks.

  • Corporate Governance: Where Do Tenth District Community Banks Stand?

    By Forest Myers and Jane Padget
    Troubles at publicly traded companies have led to the passage of recently enacted laws that add more rigor and formality to the corporate governance process. Most of these reform proposals and new laws focus on protecting investors in publicly traded firms. Relatively few Tenth District community banks, however, are publicly traded or are subject to new laws that would require them to change their corporate governance practices. Indeed, many are small in asset size, family-owned, closely held, and owner-managed. Given these characteristics, the governance process at community banks tends to be less formal and structured than requirements for publicly traded companies. What then has been the impact of corporate governance reform on community banks? Have community banks perceived benefits from the practices recommended by proponents of a more formal governance process? Although not required to do so, have community banks adopted any of the practices required of publicly traded companies? To answer these questions, the analysis in this article used information obtained from 26 governance questions included in the 2004 Tenth District Community Bank Survey. These questions dealt with matters that receive attention by good governance proponents, including board size, composition, committee structure, compensation, succession planning, director assessments, and other governance matters. Because ownership structure and size can influence the governance process, the analysis divided the survey data by family- and non-family-ownership, and within these ownership categories smaller and larger banks (assets less than $150 million, assets greater than $150 million). The conclusions drawn from the analysis are that Tenth District community banks have adopted many principles advocated by strong governance proponents. However, larger and more complex organizations are more likely to have adopted recommended governance principles. Further, non-family-owned organizations, regardless of size, proportionately engage in more of recommended practices than do family-owned organizations.

2003

  • Low- and Moderate-Income Home Financing: What Are the Trends in Kansas City?

    By James Harvey and Kenneth Spong
    Over the last decade, many significant developments have influenced home lending. Among these developments are the longest expansion period in U.S. history, pathbreaking technological and financial innovations, new regulatory and legislative incentives for low- and moderate-income lending, and continued growth of community organizations and special home lending programs.

    This article takes a look at these trends and their possible effect on home purchase lending in the Kansas City metropolitan area between 1992 and 2001. The article examines changes in home financing across the entire metropolitan area, as well as among low- and moderate-income borrowers and within low- and moderate-income neighborhoods. Also analyzed are the contributions of different types of lender banks and thrifts with local banking offices, banks and thrifts with no Kansas City banking offices, and independent mortgage companies.

    Among the more noteworthy findings in this analysis is the substantial growth that has occurred in home purchase lending for the entire Kansas City metropolitan area, with an increasing share of this lending going to low- and moderate-income borrowers and neighborhoods. Of further interest is the growing importance of home lending by banking organizations without deposit-taking offices in Kansas City. In particular, the rapid emergence of such organizations in low- and moderate-income lending provides a strong signal that this lending is meeting many of the same market tests as other forms of lending, thus foreshadowing a more continuous flow of financing to lower income neighborhoods.

  • Community Bank Performance in Slower Growing Markets: Finding Sound Strategies for Success

    By Forest Myers and Kenneth Spong
    A substantial number of community banks in the Tenth Federal Reserve District are located in rural areas that are experiencing slower economic growth, a less vibrant business environment, and little or no population increase. As a result, these banks face a variety of challenges, including how to maintain prosperous banking operations, find sound lending opportunities, and attract an adequate supply of deposits. Other possible challenges involve finding capable staff, growing and achieving an efficient scale of operations, and contributing to the health of their communities.

    This article looks at how banks that operate in slower growing markets are responding to these challenges. As a group, Tenth District banks in slower growing counties appear to be performing at a satisfactory level, but they fail to match the returns achieved by banks in faster growing markets, and they also fall short on several other performance measures.

    A portion of the banks in slower growing markets, though, are doing remarkably well. Telephone interviews with senior officers at these ?high performing? banks revealed a number of strategies and keys to their success, all of which could provide an excellent focal point for other banks in low-growth markets. These successful strategies include: getting the basic business of banking down right as the first step; being open to new business opportunities that are consistent with the bank's resources and expertise and then taking a slow and careful approach in entering these activities; and actively assisting the local community and the bank's next generation of customers.

2001

  • The 2001 Survey of Commercial Banks in the Tenth Federal Reserve District: Changes and Challenges

    By Forest Myers and Richard J. Sullivan
    Periodically, the Federal Reserve Bank of Kansas City surveys District bankers for their views on a variety of matters. In February 2001, we solicited banker opinion on a number of topics pertaining to deposit and loan competition, management and staffing challenges, Internet banking activities, funding options, operational issues, the effects of the Gramm-Leach-Bliley Act, and near-term prospects.

    This essay briefly discusses the Tenth District's geography, economics, and demographics and thereby provides context for the survey responses we received. It introduces subsequent articles that describe in more detail responses to survey topics. It also sets out the survey methodology and describes the applicability of survey results to the entire population of Tenth District banks. Broadly speaking, survey results can be generalized for all Tenth District banks.

    We also review what bankers told us about their environment, competition, and future challenges. The representative bank in the District is family owned and locally controlled. The economic and competitive environment that District banks face depends, in part, on growth prospects and diversification opportunities of the bank's communities. The most intense loan and deposits competitors are other community banks. Problems that most challenge survey respondents involve basic aspects of successfully managing a bank: funding, income sources, and meeting competition. Despite identifying many problems, all but a few bankers expect their banks will remain in business and succeed.

    Note: Much of the content in the 2001 issue of Financial Industry Perspectives is based on a survey of commercial banks. The survey itself is not included in Financial Industry Perspectives, but a complete copy, along with statistical summaries of responses, is available in Summary Results--Survey of Commercial Banks in the Tenth Federal Reserve District .

  • Management and Staffing Challenges

    By Forest Myers
    Community banks are known for their personal service and strong customer relationships. They are an important source of working capital for small businesses and act as engines of economic growth for their communities. If they are to continue in these roles, community banks must be able to attract strong, competent management and dedicated, capable staff. However, our examiners have noted a general aging of senior management at many of the banks they visit. In addition, they have noted instances of understaffing at smaller banks. With this anecdotal information, we asked Tenth District bankers if they will be able to meet their management and staff needs and what personnel challenges they see ahead over the next five years, 2001 to 2005.

    Looking forward, a significant majority of District community banks believe they can attract and retain the directors, officers, and staff they will need. In those instances where bankers saw problems ahead, invariably it was factors beyond the bank's control, lack of qualified individuals, poor community prospects, or tight labor markets that were seen as stumbling blocks rather than banks? inherent inability to pay a competitive wage. Thus, it is the demographics of the marketplace rather than the competition of the marketplace that weighs more heavily on the future of those that see problems in getting directors, officers, and staff for their banks.

    On a more specific matter, management succession may become an increasingly important issue for many banks as time passes. Many executives at survey banks plan to retire, and a good number (as many as 30 percent of chief executive officers) will reach age 65 during the next five years. However, only about 30 percent of survey banks had written succession plans. Even taking into account family ownership and possible succession arrangements within families, nearly 40 percent of survey banks were left without some form of management succession plan in place, leaving them exposed to a potential leadership shortfall at a time when officer turnover may increase. If survey results typify those for banks more generally, succession is an important evolving issue that deserves attention by bank management and bank supervisors before future turnover, expected or unexpected, occurs.

  • Performance and Operation of Commercial Bank Web Sites

    By Richard J. Sullivan
    This article reviews banker experience with Internet banking based on responses to the 2001 Survey of Commercial Banks in the Tenth Federal Reserve District. The performance of bank Web sites (measured by customer enrollment, usage rate, fee revenues, and generation of new customers) has been modest but is similar to experience of most U.S. banks. Developing policies, working with vendors, regulatory requirements, security, and marketing and promotion head the list of activities that challenge banks when installing and operating Web sites. Long-term strategic factors, such as remaining competitive, retaining customers, and updating technology motivate banks to establish Web sites. Banks with Web sites have less immediate concern with reducing costs and adding revenue. In sharp contrast, high cost and lack of customer demand are most important for banks that have decided not to install a Web site. Despite their skepticism, most banks without a Web site plan to install one within the next few years. The concluding section discusses implications of these findings for bankers, bank supervisors, and policy makers.

  • The Decline in Core Deposits: What Can Banks Do?

    By James Harvey and Kenneth Spong
    In recent years, growth in traditional deposit funding sources has failed to match the growth in assets at many banks. These funding shortfalls are raising a number of important concerns, including whether community banks will have to curtail lending to small businesses, farmers, and other local customers. This article takes a look at bank funding trends and their implications for community banks. The article also examines possible explanations for the trends, such as strong loan demand, shifts in household financial portfolios, new competition, comparative returns on other financial instruments, and changing demographics in community banking markets. The final section of the article then explores the options and strategies community banks can use to address their funding challenges.

  • Financial Modernization: A New World or Status Quo?

    By Joe VanWalleghem
    The passage of the Gramm-Leach-Bliley Act (GLB) in 1999 was a milestone in financial services regulation. GLB repealed restrictions dating back to the Depression against the commingling of securities, insurance and other financial service activities within a banking organization. While still a relatively recent event, observers ponder the early, practical impact of this legislation on the scope of activities conducted by Tenth District organizations. Our banker survey provides some revealing results on the extent of early adoption and the views of Tenth District bankers as to the perceived benefits derived from GLB and how they see these changes affecting their world. In brief, the Tenth District mirrors the nation in the somewhat modest changes to banking activities and strategic plans in this initial phase.

2000

 
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