The increasing number of charge-offs associated with these credits represents the beginning of a more challenging credit environment for institutions of all sizes. Indeed, as the slowing economy starts to impact company projections and earnings, smaller institutions will feel the effect. And, there continues to be concern about the high concentration of loans in construction and commercial real estate on many community banks' books. Liquidity a Growing Concern for Community Banks Core deposits have continued to shrink, as a percentage of total assets, while loan portfolios have grown, and the percent of liquid assets has declined. This trend has the regulators concerned, but they are particularly troubled by the number of community banks that are overly dependent on the FHLB for funding.
Regulators are also worried about an increased reliance on short-term funding.
Examiners are calling for banks to make sure that they have a sound liquidity risk management framework in place. A Contingency Funding Plan should be established that is realistic and comprehensive, and Concentrations Reports detailing funding markets and providers should be provided. At this year's Annual Conference, RMA will offer programming to address liquidity issues. You will recall that last year the Wall Street Journal reported that the FDIC had drafted a proposal to require additional regulatory capital for subprime lending. Although the FDIC proposal has been dropped and the agencies did not prescribe a specific capital charge for subprime lending, the new guidance requires examiners to more closely scrutinize institutions with subprime programs.