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The State of US Banking Jorge A. Solis Director of Banking State of Illinois

The State of US Banking Jorge A. Solis Director of Banking State of Illinois. U.S. Mexico Chamber of Commerce 6/11/09. Conditions of United States Banks. Over leveraged Limited Access to Capital Heavy reliance of brokered deposits Low profitability Continued to be saddled with toxic assets

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The State of US Banking Jorge A. Solis Director of Banking State of Illinois

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  1. The State of US BankingJorge A. SolisDirector of BankingState of Illinois U.S. Mexico Chamber of Commerce 6/11/09

  2. Conditions of United States Banks • Over leveraged • Limited Access to Capital • Heavy reliance of brokered deposits • Low profitability • Continued to be saddled with toxic assets • Low commercial loan demand • Government Intervention • Mismatched balance sheet/asset – liability • Stresses in Liquidity • Continued asset write downs

  3. Conditions of United States Banks Continued • Unable to securitize “high risk” assets • Impaired capital due to low asset valuations • Limited management experience in handling current crisis • Yield chase resulted in significant losses

  4. Conditions of Banks in Illinois • 434 State Chartered Banks and 41 Thrifts (largest number in country) • 85 percent of banks rated in top 2 categories • The median assets of these banks is slightly over $100 million. (ranging from $ 5 million to $ 70 billion). • Mostly privately held community banks • 35 received TARP funds

  5. Conditions of Illinois Banks Continued • Significant concentration of commercial real estate • General reliance on core deposits • Not as exposed to high risk derivative type products • Shrinking loan demand due to current economic conditions • Operating in highly competitive market place

  6. Conditions of Illinois Banks Continued • 6 banks (4 state, 2 national) have failed in 2009 • No consumer lost any funds in failures • Banking services resumed in all communities

  7. Common Trends in Problem Banks in Illinois • High percentages of adversely classified assets (primarily commercial real estate loans) • Over-reliance on brokered deposits • Weak oversight by boards of directors • Heavy Concentrations of Credit • Out of market lending • Investments outside of managements core competencies

  8. Short Term Expectations for Banks in the United States • Pain not over • Continued government intervention (control, executive pay, products and support of larger institutions) • More failures • Systemic Risk Regulation • Limited return of TARP funds • Limited appetite for purchase of their toxic assets • Need to deal with interest rate sensitivity issues in an expected near term higher rate interest rate environment • Shrinking balance sheets • Extension of FDIC Temporary Liquidity Guarantee Program

  9. Medium Term Expectations for Banks in the United States • Risk Weighted Capital Requirements • Separation of retail (“utility banks) from investment (“casino”) banks e.g. Glass-Steagall • Better matched asset liability mix • Diversification in portfolios and funding sources • Lower LDR (loan to deposit ratio)Laddered maturities in deposit sources

  10. Medium Term Expectations for Banks in the United States Continued • Executive pay tied to long term performance • Increased regulation • Continued shrinkage in number of banks • Need to increase capital in good times for use in bad times • Increased use of technology to reduce labor costs

  11. Long Term Trends for Banks in the United States • Return to traditional banking • Higher (and more expensive) capital requirements • A return to more “boring” banking (e.g. “originate to hold” rather than “originate to distribute” • Fewer exotic asset classifications (CDO, CDS) • Reliance on “sticky” deposits • Reduced risk taking (more conservativelending)

  12. Long Term Trends for Banks in the United States Continued • Less capital consuming products due to high cost of capital • Seek the un-banked in their market • Engaged and experienced Board of Directors • Fee intensive P and L’s • More careful attention to the liability side of the balance sheet

  13. Lessons Learned • The answer to “Too Big to Fail” is to make them smaller • Government should purge banks that are big enough to hold the system ransom • There is capital and then there is Capital • If you behave like a bank – you should be regulated like one • Capital trumps regulation • Strong management is preferred over a good business model • Regulators are fallible and regrettably always one step behind

  14. And the Good News…… • What a better time to start a bank? • -Money is cheap • -Borrowers looking for a “willing and able to lend bank” • -People are saving more • -Immediate threat of nationalization is no longer present • -Attractive Interest Rate Margins • -Pool of talented bankers available • The Government Demonstrated it can and will act quickly • Public Trust returning • FDIC Insurance Coverage expanded • Bankers and Regulators have learned tough lessons

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