Interest rate risk can never be ignored.  We all know that the FOMC has moved the fed funds rate upward by 2 percent over the last year in a series of eight quarter-point adjustments. Yet over this same period, long-term interest rates have fallen.  It is incumbent upon management to position its balance sheet so as to protect the institution from the vicissitudes of the long bond market, whether long rates remain low or revert to a more common historical pattern.

There might be a few projects in a few cities that deserve much more scrutiny from the lenders than what they're getting today.

The dual banking system is critical to the remarkable diversity and flexibility of our financial system.

Banks were not able to fully enjoy the benefits of growth in loans and securities, however, because banks' net interest margins narrowed further to 3.61 percent. Rising short-term interest rates, a flattening yield curve, competitive pressure on spreads, and rapid growth in assets funded with purchased money each played a role in the margin compression...This narrowing trend in margins bears watching, including the extent to which competitive pressures are playing a significant role. 

Despite frequent reports from bankers that their compliance costs have increased significantly and that they have incurred some significant nonrecurring charges, expense control in the industry has been good.

Bank capital ratios remain very strong.

Although bank consolidation largely reflects the search for efficiency and scope, it does not signal a threat to the banking charter or the community banking franchise. Consolidation and the growth of large banking organizations do not alter the fundamental competitive advantages that banks enjoy.

Bankers continue to rely significantly on the interest rate protection provided by their stable and reliable core deposit base. If recent deposit growth has been fueled by low interest rates and weakness in the equity markets, unexpected liquidity and interest rate pressures may develop if deposit customers shift funds to other investment vehicles.

The U.S. banking industry is healthy, strong, profitable, and well positioned to support economic growth and prosperity...The outlook for performance in the coming year is good. 

The heart of the TBTF [Too Big to Fail] problem is the fear of spillovers that motivates bailouts...Creditors know policymakers fear spillovers and, on the basis of this knowledge, expect bailouts—protection. Unless and until creditors come to understand that policymakers’ concern about spillovers has diminished, they—the creditors—will assume the status quo persists.

Underpriced access to central bank credit will of course distort private sector choices. Absent countermeasures, banks will take excessive risks and central bank credit will be overused, a distortion often referred to as moral hazard.

The potential for moral hazard due to a public sector safety net, and in particular the provision of central bank credit in connection with payment operations, is to my mind the central rationale for central bank oversight of payment system participants...It is my sense that central banks have not come close to fully offsetting the safety net’s moral hazard distortion, although I would be hard pressed to document that claim, except to note the extent to which access to central bank settlement seems to be highly prized by financial institutions. 

My sense, however, is that there are far less by way of economies of scope than would be needed to justify, on economic efficiency grounds, the current scale of Federal Reserve service provision, particularly in clearing “retail” payments such as checks and ACH. In fact, I have argued elsewhere that the evidence suggests that the Fed’s role in clearing retail payments rests on altering the allocation of clearing costs that would result from purely private provision.

Years ago, when many aspects of current arrangements were put in place, operational considerations made it costly to implement systems that did not automatically extend daylight central bank credit in one form or another. New technologies may have significantly altered this cost-benefit trade-off, and in my opinion a re-examination of daylight credit policies is in order.

I do not believe that our understanding of the economics of intraday credit is at this point sufficient to provide quantitative guidance on the optimal pricing of daylight credit, even apart from moral hazard considerations.