With Vice Chairman for Supervision Randal Quarles scheduled to testify on Capitol Hill next week, the Federal Reserve today released its second report on its regulatory and supervisory activities for banking companies. The report demonstrates the continued health and soundness of the banking industry. Figures in the report show that industry profitability ratios remain high, driven in part by the industry’s net interest margin reaching a six-year high.
Nonperforming loans reached a new 12-year low at roughly 1% by the end of 2018. While capital ratios edged down slightly at some large banks, driven in part by growth in total banking assets, the industry’s capital levels “remain well above regulatory requirements” and in line with post-crisis figures, the report noted. However, it showed that capital ratios climbed in 2018 for the 12 large firms in the Fed’s Large Institution Supervision Coordinating Committee portfolio, as well as for community banks.
The report also outlined 2019 supervisory priorities for firms in different Fed supervisory portfolios. For LISSC firms, the Fed is focusing on governance of capital planning, model sensitivity analysis, wholesale credit underwriting standards, risk exposure to nonbanks, cash flow forecasting, liquidity risk limits, intraday liquidity risk, operational resilience, business line management, board effectiveness and resolution planning. At other large U.S. and foreign banks, the focus will be on loss-estimation methodologies for real estate portfolios, liquidity buffers, contingency funding, and AI for fraud and anti-money laundering, among other topics.
For regional and community banks, the Fed is looking at credit concentrations in CRE and construction, cybersecurity and AML/BSA compliance. At regional banks, the Fed will also focus on underwriting practices, M&A risks and internal audit; community banks will see focus on ag lending and liquidity risk.