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Banking News: Latest from Federal Reserve and FDIC

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To keep you current on the state of the industry, we regularly offer a recap of the latest news impacting banks, wealth management firms, fintechs and others in the finserv space. We’ve taken the most relevant aspects of recent statements from the Federal Reserve on bank’s resilience, and the FDIC’s Report on the industry’s financial stability here.

Feds Note Bank Resiliency in Report

The Federal Reserve Act requires the Federal Reserve Board to submit written reports to Congress containing discussions of “the conduct of monetary policy and economic developments and prospects for the future.” This report⁠—called the Monetary Policy Report⁠—is submitted semiannually, pursuant to section 2B of the Federal Reserve Act, to the Senate Committee on Banking, Housing, and Urban Affairs and to the House Committee on Financial Services, along with testimony from the Federal Reserve Board Chair.

In a news story from the American Banking Association (ABA), shared through its Banking Journal digital Newsbytes article dated Feb. 25, 2022, the ABA offered this overview of the recent Federal Reserve report:

The nation’s large banks at the core of the financial system “continue to be resilient” while some financial vulnerabilities remain elevated, the Federal Reserve said today in its semiannual monetary policy report. The Fed noted that banks continue to maintain significant levels of high-quality liquid assets, while assets under management at tax-exempt money market funds have declined further since mid-2021.

Bank lending standards have eased across most loan categories, and bank credit has expanded, the report said, adding that “all told, financing conditions have been accommodative for businesses and households.” The Fed said that it continues to evaluate the potential systemic risks posed by hedge funds and digital assets and is closely monitoring the transition away from Libor.

Inflation rose to its highest level since the early 1980s in the second half of 2021, the report said, adding that it is well above the Federal Open Market Committee’s longer-run objective. FOMC members have signaled that it will “soon be appropriate to raise the target range for the federal funds rate,” the report noted.

Federal Reserve Report Summary

The Federal Reserve, in its Monetary Policy Report issued February 25, 2022, offered this:

“U.S. economic activity posted further impressive gains in the second half of last year, but inflation rose to its highest level since the early 1980s. The labor market tightened substantially further amid high demand for workers and constrained supply, with the unemployment rate reaching the median of Federal Open Market Committee (FOMC) participants’ estimates of its longer-run normal level and nominal wages rising at their fastest pace in decades. With demand strong, and amid ongoing supply chain bottlenecks and constrained labor supply, inflation increased appreciably last year, running well above the FOMC’s longer-run objective of 2 percent and broadening out to a wider range of items. As 2022 began, the rapid spread of the Omicron variant appeared to be causing a slowdown in some sectors of the economy, but with Omicron cases having declined sharply since mid-January, the slowdown is expected to be brief.

Over the second half of last year, the FOMC held its policy rate near zero to support the continued economic recovery. The Committee began phasing out net asset purchases in November and accelerated the pace of the phaseout in December; net asset purchases will end in early March. With inflation well above the FOMC’s longer-run objective and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.

Writing on recent economic and financial developments, the Federal Reserve offered this:

Financial conditions. Yields on nominal Treasury securities across maturities increased notably since mid-2021, with much of the increase having occurred in the past couple of months, as the expected timing for the beginning of the removal of monetary policy accommodation has moved forward significantly. Equity prices decreased slightly, on net, and corporate bond yields rose but remain low, with stable corporate credit quality. Financing conditions for consumer credit continue to be largely accommodative except for borrowers with low credit scores. Mortgage rates for households remain low despite recent increases. Bank lending standards have eased across most loan categories, and bank credit has expanded. All told, financing conditions have been accommodative for businesses and households.

Financial stability. While some financial vulnerabilities remain elevated, the large banks at the core of the financial system continue to be resilient. Measures of valuation pressures on risky assets remain high compared with historical values. Non Financial-sector leverage has broadly declined, and credit growth in the household sector has been driven almost exclusively by residential mortgages and auto loans to prime-rated borrowers. Vulnerabilities from financial-sector leverage are within their historical range, with relatively lower leverage at banks partially offset by higher leverage at life insurers and hedge funds. Funding markets remain stable. Domestic banks continue to maintain significant levels of high-quality liquid assets, while assets under management at prime and tax-exempt money market funds have declined further since mid-2021. The Federal Reserve continues to evaluate the potential systemic risks posed by hedge funds and digital assets and is closely monitoring the transition away from LIBOR. (See “Developments Related to Financial Stability” box). Regarding “Developments Related to Financial Stability, the Report offered this:

“Bank credit expanded and bank profitability remained strong”

Total loans and leases outstanding at commercial banks expanded significantly in the second half of last year, driven by continued solid growth in commercial real estate, residential real estate, and consumer loans, which outweighed declines in commercial and industrial loans. In both October and January, the Senior Loan Officer Opinion Survey on Bank Lending Practices, conducted by the Federal Reserve, reported easier standards for most loan categories over the second half of 2021. In the January survey, respondents generally anticipated a further easing of lending standards and stronger loan demand over the current year.

Bank profitability remained strong, declining slightly over the second half of last year but remaining at pre-pandemic levels, helped by the continued release of loan loss reserves, given solid credit quality indicators. Delinquency rates on bank loans remained low relative to historical averages throughout the second half of 2021.”

FDIC Quarterly Banking Profile

In other related news, on March 1, 2022, the Federal Deposit Insurance Corporation (FDIC) issued its Quarterly Report, “FDIC-Insured Institutions Reported Net Income of $63.9 Billion in Fourth Quarter 2021.”

“With strong capital and liquidity levels to support lending and protect against potential losses, the banking industry continued to meet the country’s credit needs while navigating the economic effects of the pandemic,” said FDIC Acting Chairman Martin J. Gruenberg. In the report summary, he added, “Still, challenges remain, as rising interest rates and geopolitical uncertainty could negatively affect bank profitability, credit quality, and loan growth going forward.”

In issuing a summary news release, the FDIC noted: Reports from 4,839 commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reflect aggregate net income of $63.9 billion in fourth quarter 2021, an increase of $4.4 billion (7.4 percent) from a year ago. This increase was driven by further economic growth and improved credit conditions, which led to expanded net interest income and a fourth consecutive quarter of aggregate negative provision expense. These and other financial results for fourth quarter and full-year 2021 are included in the FDIC’s latest Quarterly Banking Profile released today.

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system. The FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships.

We’re hopeful these banking news and notes help keep you current on regulatory agency reports, global and national news. As we continue to deposit assets into our bank of resources, we’re eager to help offer information and insights that financial services marketers can leverage information and technology to navigate this complex industry.

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