The nation’s banks “remain resilient” amid ongoing pressures brought on by the pandemic, the Federal Reserve said today in its semiannual monetary policy report. The Fed noted that bank profitability and capital positions improved in the second half of 2020, citing lower-than-expected losses and an improved economic outlook, among other things.
Credit continued to flow to households and businesses, and while the Fed observed “substantial” tightening of lending early in 2020, it moderated in the second half of the year. “In the small business sector, privately financed lending also picked up over the summer, and loan performance improved, supported by the Paycheck Protection Program,” the report said. “Nevertheless, credit availability for small businesses remains fairly tight, demand for such credit is weak, and default risk is still elevated.”
The Fed also flagged a need for “structural reforms” to money market mutual funds and open-end investment funds, which experienced extreme volatility in the early days of the pandemic. Without such reforms, these vulnerabilities “will persist and could significantly amplify future shocks,” the report said.