STATE GOVERNMENT RELATIONS
Holcomb Fine with a Quick Legislative Session
Holcomb said he was fine with a quick session following the 2023 session's approval of a two-year state budget with hundreds of millions of dollars toward the state's economic development agency, a broad public health program expansion and state building projects. He said he wants to focus on government efficacy and transparency, wrapping up outstanding or in-progress projects and increasing awareness of current government programs.
The wrap-up mentality of those goals is likely due to this being Gov. Holcomb’s final legislative session. He is unable to run for re-election as he is term-limited.
Revenue Dip, End of Federal Money Prompt Urge of Caution on State Spending
A slowdown in state tax revenue growth and continuing worries about a possible recession have a legislative fiscal leader calling for more cautious state spending.
The end of federal COVID-19 relief funding will also mean a significant change in how the Republican-dominated Legislature draws up the next two-year budget during the 2025 session. Lagging sales tax collections have left state tax revenue an overall $115 million, or 1.4%, behind projections for the first five months of the current state fiscal year that started July 1. The State Budget Committee is expected to receive an updated revenue forecast for the rest of this fiscal year during a meeting next Tuesday, Dec. 19.
Total general fund revenue so far for this fiscal year is just 0.1% higher than the same period a year earlier. That follows revenue falling 0.6% during 2022-23 after jumping about 9% and 14% in the previous two years.
FEDERAL GOVERNMENT RELATIONS
Senators Introduce Bill to Increase Transparency in Bank Exams
Two senators Thursday introduced legislation they said would create a fair appeals process for banks and increase transparency in the bank examination process. The Fair Audits and Inspections for Regulators' Exams Act, sponsored by Sens. Jerry Moran, R-Kan., and Joe Manchin, D-W.Va., would establish an appeals process to resolve disagreements between banks and regulators by hiring an independent director to review appeals. Sens. Thom Tillis, R-N.C., and Bill Hagerty, R-Tenn., have signed on as co-sponsors.
According to the sponsors, the FAIR Exams Act would require regulatory agencies to issue timely responses to bankers during the examination process. It would require the Federal Financial Institutions Examinations Council to make available the information relied upon for determinations upon request. It would also create an independent examination review director within the FFIEC to address examination complaints and procedures as well as provide financial institutions with the right to seek review of supervisory determinations with the director.
FDIC's McKernan Suggests Implementing Basel Endgame in Stages
FDIC board member Jonathan McKernan said Tuesday that he is open to a phased-in approach to U.S. adoption of the Basel III endgame proposal that "punts on the underdeveloped aspects" but implements its less-contested directives. In July, McKernan and FDIC Vice Chairman Travis Hill voted against an interagency proposal to implement the Basel III endgame by raising capital requirements for banks with more than $100 billion in assets. During a speech in New York, McKernan reiterated his concern that the Basel committee made decisions with little or no explanation for how it reached its conclusions but added that he was willing to consider moving ahead with implementation if regulators delay the adoption of its more controversial reforms while more data is collected.
"Delaying implementation of the underdeveloped aspects would allow time for a trial run of the rest of the framework," McKernan said, adding that such an approach also would provide an opportunity to "gather data and conduct analysis" to "recalibrate or improve" some of the "underdeveloped" pieces of the proposal. "That also could permit us to disclose through subsequent rulemakings the rationale and evidence for our eventual U.S. implementation," he said.
McKernan said he supports efforts to enhance the regulatory capital framework, "but I am unable to support rote adoption of the Basel reforms without some validation of the underlying rationale for key design decisions. And I oppose efforts to reverse engineer higher capital requirements without regard to the costs and benefits or the underlying calibration framework. That does, however, seem to leave open an approach that moves to finalize the less-contested aspects of the endgame market risk reforms and then finalizes the rest through future notice-and-comment rulemakings that can rationalize our own U.S. implementations."
Basel Committee Proposes Adjustments to Standard on IRRBB
The Basel Committee on Banking Supervision is proposing targeted adjustments to its standard on interest rate risk in the banking book, or IRRBB, the Bank of International Settlements announced Tuesday. Specifically, the committee seeks to update the calibration of the standard's interest rate shock parameters and the methodology used to calculate the shocks.
The IRRBB standard requires banks to calculate measures of interest rate risk for their banking book exposures. According to BIS, the measures are based on a specified set of interest rate shocks for each currency for which the bank has material positions. The IRRBB standard was first established in 2016 by the Basel committee, which periodically updates the calibration of the interest rate shock factors used. Public comments on the proposal are due Mar. 28, 2024.
FOMC Leaves Rates Unchanged, Signals Potential Cuts
The Federal Open Market Committee announced Wednesday that it would once again leave the federal funds rate unchanged at 5.25-5.5% and signaled that it may begin lowering the rate next year. The decision marked the fourth time this year that the committee has left the rate untouched.
In a news conference, Federal Reserve Chairman Jerome Powell cautioned that while inflation has eased over the past year, "we will need to see further evidence to build confidence that inflation is moving down sustainably toward our goal." Still, the median projection for the appropriate level of the federal funds rate by FOMC participants was 4.6% at the end of 2024, 3.6% at the end of 2025, and 2.9% at the end of 2026, he said.
In terms of when FOMC could begin dialing back the rate, Powell said the answer depends on several factors. "We are seeing strong growth that appears to be moderating," he said. "We're seeing a labor market that is coming back into balance by so many measures, and we're seeing inflation making real progress. These are the things we've been wanting to see. We still have a ways to go. No one is declaring victory – that would be premature – and we can't be guaranteed in this progress. So we're moving carefully and making that assessment of whether we need to do more or not."
Yellen Upbeat on Potential Soft Landing for Economy
Treasury Secretary Janet Yellen says she is confident the U.S. economy will experience a soft landing, with her remarks coming as economists' previously widespread concerns about a recession continue to dissipate. "To me, a soft landing is the economy continues to grow, the labor market remains strong and inflation comes down. And I believe that's the path we're on," Yellen said
New York Fed: Inflation Expectations Mostly Unchanged in November
Consumer inflation expectations in November declined at the short-term horizon but remained unchanged at the medium and longer-term horizons, according to the Federal Reserve Bank of New York's monthly Survey of Consumer Expectations released Monday. Median one-year-ahead inflation expectations declined by 0.2 percentage points in November to 3.4%, the lowest reading since April 2021. Median inflation expectations at the three- and five-year-ahead horizons remained unchanged at 3.0% and 2.7%, respectively.
Median expected growth in household income was unchanged at 3.1% in November, remaining above the survey's pre-pandemic level of 2.7% in February 2020, according to the New York Fed. Median household spending growth expectations declined by 0.1 percentage points to 5.2%.
Perceptions of credit access improved, with fewer respondents reporting that it is harder to obtain credit today compared to a year ago, according to the survey. Similarly, consumers were more optimistic about future credit access, with fewer respondents expecting tighter credit conditions a year from now. The average perceived probability of missing a minimum debt payment over the next three months decreased by 0.2 percentage points to 11.8%, a level comparable to those prevailing just before the pandemic.
OCC: Banking System Remains Sound
The federal banking system is sound, with banks focused on stabilizing liquidity and maintaining confidence in the system, the OCC said Monday in its annual report to Congress. The agency said the federal banking system comprised 1,062 banks and federal branches as of Sept. 30, with 753 banks with less than $1 billion in assets and 55 with more than $10 billion. In total, the banks within the system hold $15.4 trillion, or 66%, of all assets of U.S. banks and more than more than 73% of credit card balances in the country.
The federal banking system's liquidity ratio stood at 19.3% of assets in the first half of 2023, a slight decline from 2022's liquidity ratio of 20.8%, but well above the pre-pandemic long-term average of 7.6% from 1984 to 2019, the OCC said. The system was also well capitalized. The tier 1 leverage ratio stood at 8.8% in the first half of 2023, gradually increasing for the third consecutive year and steadily returning to its pre-pandemic high of 9.4% in 2018. System profitability remained healthy through the first half of 2023, supported by net interest margins.
OCC said Credit quality ratios increased slightly in the first half of 2023 but remained below their long-term average. The rate of nonperforming loans was 0.8%, unchanged from last year and well below the historical average of 2.3%. Net charge-offs as a share of total loans rose to 0.5% as of June 2023 from 0.3% in 2022. The agency said that despite the recent uptick, net charge-offs remain below the pre-pandemic average of 0.9%.
OCC Releases Mortgage Performance Report for Third Quarter 2023
On Tuesday, the OCC released the third quarter 2023 mortgage metrics report, which showed that 97.3% of first-lien mortgages in the federal banking system were current and performing at the end of the quarter. According to the agency, the figure was unchanged from the previous quarter, but mortgage performance improved slightly compared to Q3 2022, when 97.2% of mortgages were current and performing.
According to the OCC, the percentage of seriously delinquent mortgages was 1.1% in Q3, the same as the previous quarter and a decrease from 1.3% a year ago. Servicers initiated 8,965 new foreclosures, an increase from the prior quarter but a decrease from a year earlier. The agency also reported that servicers completed 7,436 modifications, a 13.8% decrease from the previous quarter's 8,623 modifications. Of the modifications, 85.6% were "combination modifications" – modifications that included multiple actions affecting the affordability and sustainability of the loan, such as an interest rate reduction and a term extension.
The first-lien mortgages included in the OCC's quarterly report comprise 22% of all residential mortgage debt outstanding in the U.S., or approximately 11.8 million loans totaling $2.7 trillion in principal balances.