Fed: Banks Entered Coronavirus Pandemic in Strong Condition

The nation’s banks “entered the current crisis well positioned to support continued lending” during the pandemic, the Federal Reserve said in its supervision and regulation report released today. The Fed noted that bank capital and liquidity positions were strong before the coronavirus outbreak began, enabling them to absorb higher credit losses, continue lending and meet their obligations to creditors while meeting the needs of households and businesses.

The Fed highlighted the significant operational challenges banks are now facing as they work to comply with state and local social distancing measures, such as lobby restrictions, reduced hours or drive-through only operations. The report also noted that bank profits fell sharply in the first quarter, driven primarily by a substantial increase in loan loss provisions. Bank capital levels declined from high pre-pandemic levels, driven by increases in risk-weighted assets, while strains in funding markets have lessened since late March, leading to more stable liquidity conditions.

In response to the crisis, the Fed enacted a number of regulatory changes aimed at maintaining the flow of credit to household operations and ease operational burdens for banks, including encouraging the use of capital liquidity buffers to meet credit needs; delaying the capital impact of CECL; temporarily lowering the community bank leverage ratio requirement; and encouraging firms to participate in several newly established liquidity facilities. With regard to supervision, Fed regulators continue to encourage banks to work constructively with customers facing financial hardships while maintaining safety and soundness, the report said.

“In many ways, the short-term supervisory response to the containment measures echoes the response to a natural disaster, such as a hurricane or flood, except that the response has been nationwide,” the report noted.