Torrey & Gray attended the 11th Annual Risk Conference at the Federal Reserve Bank of Chicago this week. Charles Evans, the President and CEO of the Chicago Fed had a candid open conversation about the relative strength of the economy, predicted near term regulatory relief for mid-tier and community banks as well as opining on interest rate policy.
On the topic of interest rate risk, Doreen Eberly, a Director in the Division of Risk Management Supervision for the FDIC, pointed out that in the low interest rate environment there have been very few de novo (new bank charters). In a recent article in American Banker, it listed a grand total of five new banks opening in the U.S. from 2013-2017. With the prospect of rising interest rates, those may start to spring up. That is good news for consumers, as it will create market pressure to pay deposit interest. Banks will try to capitalize on the opportunity to earn higher interest as long as possible and keep their fingers crossed that market competition does not drive impetus to pay deposit interest. One panelist suggested most Americans under the age of 30 have NEVER earned any interest on deposits.
Mr. Evans also suggested that in an near zero interest rate environment, there are fewer tools to affect stimulus in the future. In essence he feels the need to gradually increase rates while the market is relatively strong, so in the future if needed, they will have rate reduction as a mechanism to spur market growth.
Rising rates will also trigger active Treasury Management efforts, which have laid dormant in a near zero interest environment.
Unemployment is at 4.1% and expected to fall to the 3.5% range. This may drive wages higher as employers struggle to find and recruit top talent.
There is no current backlog of troubled institutions said Arthur Lindo, Deputy Director, Board of Governors of the Federal Reserve. He suggested this lays a foundation for banks to become more willing to lend and return capital to the markets.
Other risks gaining more attention revolve around operational issues such as data loss and third party data backup. Will these service providers start catching the eye of regulators? Yes, but expect a measured approach.
Banks and regulators feel as though they have made it through a time of intense scrutiny to improve capital quality and implement systems to capture and analyse a wider data set. Under Dodd-Frank, banks have had to demonstrate a best effort to understand their capital structure, project (model management) outcomes under a variety of market conditions, show that they have made an acceptable effort to back up their models (model validation), capture more customer data (KYC) and monitor their activities (AML) as well as write their own dissolution plan in the event of institutional failure.
Bitcoin was mentioned once but was not directly addressed. In the context of the effect of distributed ledger and other emerging technology as a possible risk set, again a measured approach was outlined. Regulators are starting to look into the opportunities emerging fintech can afford and how they should respond.
For the full Risk Conference agenda go to the event website https://www.chicagofed.org/events/2018/risk-conference
Torrey & Gray will attend the upcoming the upcoming 3rd Annual Chicago Blockchain Conference on April 27th. For more information go to https://www.blockchain-chicago.com/
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