The FDIC today flagged high loan concentrations, as well as the interest rate environment and short-term liquidity challenges, as key risks facing banks in 2019. In its annual risk review publication, the agency said that while the financial condition of FDIC-supervised banks remains strong, markets have seen increased volatility in recent months and economic growth is expected to continue slowing.
With competition for loans increasing amid slower growth, the FDIC noted that “market demand for higher-yielding leveraged loan and corporate bond products has resulted in looser underwriting standards.” Banks that are highly exposed to volatile sectors—such as agriculture, commercial real estate or corporate debt—could be particularly susceptible to fluctuations in the market, the FDIC said.
Turning to market risk, the agency noted that banks—particularly community banks—could experience challenges finding low-cost deposit funding in the months ahead. In addition, short-term liquidity at smaller institutions has declined over the years, which could have consequences for institutions that find themselves in a liquidity crunch if the credit cycle takes a turn, the FDIC said.
