1. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 1 The State of US Banking Jorge A. Solis Director of Banking State of Illinois U.S. Mexico Chamber of Commerce 6/11/09

2. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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 conservative lending)

12. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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. ILLINOIS DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION I DFP R 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