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» VISIT US ONLINE @ DSNEWS.COM 45 AS BANKING INDUSTRY IMPROVES, RISK INCREASES As the United States economy continues to improve, the challenges facing the banking industry gradually shift from recovery to risk management in an effort to avoid the pitfalls that contributed to the financial crisis. In that spirit, the Office of the Comptroller of Currency re- leased its Semiannual Risk Perspective of Spring 2014, offering an overview on the current health of the market and highlighting the significant risk-related challenges that currently face the banking industry. e report emphasized that 2013 was a year of steady improvement in the banking industry overall, as net income was at an all-time high, approaching $108 billion and eclipsing the record that was established in 2006 before the collapse. However, the uptick in earnings still comes chiefly from lower non-interest and provision expenses instead of organic growth. Revenue declined modestly as lower net- interest income more than offset modestly higher non-interest income. Lackluster growth in loans issued and persistent low interest rates continue to depress net-interest margins. e report found that a decline in new foreclosure activity helped to offset declining origination activity in 2013. New foreclosure starts are down in the prime and subprime segments, indicating a slow, but widening, housing market stabilization. e percentage of seriously delinquent mort- gages declined to 3.5 percent from 4.4 percent a year earlier. Foreclosures in process declined 37 percent from 3.3 percent of loans outstanding in the fourth quarter of 2012 to 2.1 percent in the fourth quarter of 2013. Originations started out strong in 2013, but rising interest rates beginning in May caused activity to slow in the second half of the year. Demand for mortgages remains low as gains in job and income growth continue to be slow. Because of the lack of organic growth, many banks are reevaluating their business models, deployment of capital, and risk appetites in the challenging operating environment. Some banks are taking on additional risks by expanding into higher-risk products. e competition is becoming more intense, resulting in eased underwriting across a variety of financial products. In short, the banks are fight- ing tooth and nail for business and are increas- ingly willing to assume riskier endeavors to push revenue. e OCC warned that banks' boards of directors and senior managers should monitor heightened exceptions to traditional underwriting standards and be aware of the product terms that produce additional risks. Compliance programs should keep pace with the volume and complex- ity of regulatory changes and changes in bank customers and transactions. Business lines within banks should perform thorough risk self-assess- ments and identify, assess, monitor, and mitigate emerging risks. CHINA POISED TO BECOME FORCE IN U.S. HOUSING MARKET As the United States' neighboring countries lose their economic edge in the nation's home market, analysts at Capital Economics suggest China might soon become the biggest foreign buyer of U.S. housing. In a recently released, the National As- sociation of Realtors (NAR) found foreign purchases of U.S. real estate surged in the 12 months ending in March to $92.2 billion, an increase of 35 percent over the prior period. In a note to clients, Paul Diggle, property economist at Capital Economics, insisted that foreign contributions to the housing recovery remain marginal even with the increase. "Foreign buyers remain relatively peripheral to the housing recovery for a number of reasons," Diggle wrote. "For Canadian and Mexican buyers ... currency movements have compounded the impact of rising house prices, reducing the extent to which US housing looks undervalued." Meanwhile, income growth in China has made U.S. housing a relatively cheap investment. From April 2013 through March 2014, Chinese buyers accounted for 16 percent of foreign home sales, up from 12 percent in 2013 and just 5 percent in 2009. In dollar volume, China's share is higher, accounting for $22 billion—about 24 percent—of sales during that period. While that's still only a small fraction of the more than $1 trillion in total home pur- chases over the past year, Diggle adds that the influence of Chinese buyers has climbed as high as 35 percent of all sales in Califor- nia and a further 28 percent in Washington, New York, Pennsylvania, and Texas. at concentration extends even further in the market for single-family homes selling for more than $500,000 in suburban areas. Even with tightening monetary policy keeping foreign demand down in the near future, Diggle predicts Chinese buyers could outweigh Canadians as the largest source of foreign demand within five years should trends continue.

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