Throughout the COVID-19 crisis, “the benefits of a resilient banking system have been evident” as banks’ “strong capital and liquidity positions” have enabled the pandemic recovery, the Federal Reserve said today in its supervision and regulation report. During the crisis, banks were able to build additional capital and end the year with capital ratios at most firms remaining well above regulatory minimums, the Fed said. Liquidity also strengthened from an influx of deposits.
The report also found that large firms showed operational resilience through the pandemic. In particular, “digitization of banking activities allowed firms to continue these operations in the remote work environment,” the Fed said. Meanwhile, community and regional banks “are generally addressing the risks arising from the COVID event within their loan portfolios and operations,” according to the report. Given the increased reliance on technology during the pandemic, the Fed said it expects these firms to remain vigilant about cyber threats and ensure sound third-party risk management practices.
While the banking system remains healthy overall, the Fed did note that bank lending activity has been slow outside of Paycheck Protection Program loans. The report also flagged a slight increase in delinquency rates, which it observed most significantly in residential real estate and commercial real estate loans, and continued loan modification activity as borrowers continue to face COVID-related challenges. Bank net interest margins also continued to trend downward in 2020, though they recovered slightly toward the end of the year after a sharp drop in the first three quarters.