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Central Banker - Spring 2011

Central Banker - Spring 2011

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Categories:Types, Research
Published by: Federal Reserve Bank of St. Louis on May 26, 2011
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Meet the New Advisory Council | District, Peer Banks Still Navigating Difcult Waters
continued on Page 7 
 By Gary Corner
ince the passage o the Dodd-FrankAct in July 2010, which requiredthe Federal Reserve Board to establishstandards or determining whetherdebit interchange ees are “reasonableand proportional” to the cost o thetransaction, one argument in avor o this section o the legislation has beenthat debit cards are essentially “plasticchecks.Many merchants, in particu-lar, have suggested that the swipe o a debit card should translate to a parpayment like paper checks.To understand the reasonablenesso this assertion, it’s helpul to explorethe development o the check platormthat began during the national bankingera (rom the Civil War to World War I).Over this more than 50-year period,checks emerged as a more efcientpayment medium than bank notes anddrats. Initially, checks could clear ateither par or par less an exchange ee,the latter a precursor to what is calledan “interchange ee” today. Rulesassociated with exchange ees were notstandard in the late 19th and early 20thcenturies, and the imposition o a eecould depend on whether local bankshad agreements in place to clear eachothers’ checks at par.As railroads expanded and regionalcommerce increased, check clearing atpar became more problematic. Checksdrawn on distant banks cost moreto clear and were riskier. Critics at
What i Debit Card TransactionsExchanged at Par?
the time claimed exchange ees were“excessive” and even “monopolistic”on the part o banks. Common law,however, provided that check cash-ers could receive ace value i they presented the check in-person at thecheck payer’s bank, thus creating amarket distortion that led to less-than-optimal pricing.In 1915, the Federal Reserve enteredthe check clearing business partly inresponse to the concerns over not-at-par banking. The Fed set up anational system or check clearing and
See the ollowing or urther inormation on theDodd-Frank Act debit interchange ees rulemaking:
 Routing Proposals” in the online version o thisissue (www.stlouised.org/publications/cb/)gives a macro overview o the proposals.
at http://stlouised.org/regreormrules/rules/2010-32061.cm on the St. Louis Fed’sDodd-Frank Regulatory Reorm Rulesweb site.
Explore More
 News and Views for Eighth District Bankers
Vol. 21 | No. 1www.stlouisfed.org/publications/cb
Scott Kelly314-444-8593scott.b.kelly@stls.frb.org
Central Banker 
is published quarterly by thePublic Aairs department o the FederalReserve Bank o St. Louis. Views expressedare not necessarily ofcial opinions o theFederal Reserve System or the FederalReserve Bank o St. Louis.Sign up or
Central Banker 
e-mail notices atwww.stlouised.org/publications/cb/. Followthe Fed on Facebook, Twitter and more atstlouised.org/ollowtheed.To subscribe or ree to
Central Banker 
orany St. Louis Fed publication, go online towww.stlouised.org/publications/subscribe.cm.To subscribe by mail, send your name, address,
 P.O. Box 442, St. Louis, MO 63166-0442.The Eighth Federal Reserve District includesall o Arkansas, eastern Missouri, southern
Tennessee, and northern Mississippi. TheEighth District ofces are in Little Rock,Louisville, Memphis and St. Louis.
Broadening theDialogue
 By Julie Stackhouse
his issue o 
Central Banker
containstwo articles on the recent FederalReserve rulemaking that would limitdebit interchange ees. (See articleson Page 1 and online at stlouised.org/publications/cb.) Banks rom acrossthe country have voiced their opinionson this controversial rulemaking by using a public comment process thatclosed in late February. More than7,000 comments were received by theBoard o Governors.The ormal comment process onproposed regulations is one channelopen to bankers to express opinions.There are many other channels, as well.Clearly, much communication occursthrough the supervisory process.Moreover, it is not uncommon or Fed economists and regu-lators to speak at community and industry events in whichbankers, community groups, academics and members o thegeneral public are in attendance.More recently, the Board o Governors announced a new communication vehicle or depository institutions, createdthrough the ormation o Community Depository Institu-tions Advisory Councils. (See article on Page 4.) Thesecouncils, which have been established in all 12 FederalReserve Districts, will be comprised o senior executivesrom community lending institutions (commercial banks,thrits and credit unions with less than $10 billion in assets).At least twice per year, council members will meet to discussa variety o issues, including local economic and bank-ing conditions, and regulatory matters. The leader o eachcouncil will travel to Washington, D.C., twice per year toshare the view o his or her District council with the Boardo Governors.Inormation sharing and dialogue is important or bank-ers and regulators alike. We view it as critical that the voiceo “main street” lending institutions be considered in theormulation o good supervisory policy.We will do our best to improve and grow the dialogue process.We hope you will eel comortable contributing your voice!
 Julie Stackhouse issenior vice president of the St. Louis Fed’sdivision of BankingSupervision, Credit and the Center forOnline Learning.
Central Banker
District, U.S. Peer Banks StillNavigating Difcult Waters
 By Michelle Neely
roftability at the nation’s banksmade quite a turnaround in 2010,but asset quality issues—linked pri-marily to commercial real estate—arestill weighing heavily on the industry.Return on average assets (ROA) aver-aged 0.53 percent at District banks at year-end 2010, up 44 basis points roma year ago. ROA at U.S. peer banks—those with average assets o less than$15 billion—also rose substantially in2010, but remains below the District’saverage at 0.28 percent.The year-over-year improvementin proftability is due in large partto marked upticks in the net interestmargin (NIM), which rose 20 basispoints in the District and 25 basispoints at peer banks. Rising NIMsare due entirely to decreases in inter-est expense that exceed decreases ininterest income. A substantial reduc-tion (13 basis points) in net noninter-est expense provided another boost toROA at District banks in 2010. Earn-ings also increased because o signif-cant declines in loan loss provisions in2010 at both sets o banks, even thoughasset quality has improved modestly,i at all.The ratio o nonperorming loansto total loans at District banks heldbasically steady between the thirdand ourth quarters at 3.27 percent,a worsening o 41 basis points rom a year ago. In contrast, the nonperorm-ing loan ratio ell 13 basis points in theourth quarter at peer banks; the year-end ratio o 3.95 percent is 20 basispoints below its year-ago level.Real estate loans remain the driveror the perormance o the overallloan portolio both in the Districtand nationally, and market condi-tions—both residential and commer-cial—have not improved appreciably.Within the real estate portolio, there were declines in nonperormingconstruction and land development(CLD) loans in the ourth quarter. In
District, the proportion o CLDloans that were nonperorming ell21 basis points to 12.27 percent, whileit ell 33 basis points at U.S. peers to14.81 percent. Though this is certainly good news, these ratios remain nearhistoric highs.Nonperorming rates in the nonarmnonresidential segment continue torise at District banks o all sizes; theproportion o nonarm nonresidentialloans that were nonperorming at year-end was 2.93 percent, up 17 basis pointsrom the third quarter. The nonper-orming rate or these loans at peerbanks actually declined slightly in theourth quarter but remains well abovethe District’s average at 3.61 percent.Although delinquency rates remainsteady in the consumer segment, they continue to edge up in the commercialand industrial (C & I) portolio; thenonperorming C & I ratio hit 2.19 per-cent at District banks and 2.40 percent
at peer banks at year-end 2010.
Steady as She Goes
2009: 4Q 2010: 3Q 2010: 4Q
District Banks 0.09% 0.57% 0.53%U.S. Peer Banks-0.370.32 0.28
District Banks 3.67 3.84 3.87U.S. Peer Banks 3.65 3.87 3.90
District Banks 1.07 0.82 0.86U.S. Peer Banks 1.60 1.06 1.06
District Banks 2.86 3.30 3.27U.S. Peer Banks 4.15 4.08 3.95
SOURCE: Reports of Condition and Income for Insured Commercial BanksNOTES:
Because all District banks but one have assets of less than $15 billion, banks largerthan $15 billion have been excluded from the analysis.
All earnings ratios are annualized and use year-to-date average assets or averageearning assets in the denominator.
Nonperforming loans are those 90 days or more past due or in nonaccrual status.
continued on Page 7 
Central Banker
Spring 2011| 

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