Fed: Banking System Conditions Improved in 2021 as Banks Remain Strong

The financial condition of the banking system remained strong and improved during the first half of 2021, despite some lingering concerns, the Federal Reserve found in its latest supervision and regulation report released today. As the economic recovery from COVID-19 continued in the first half of the year, banks saw early signs of loan growth emerging, along with falling delinquencies and forbearances, and an increase in profitability, the Fed said.

Average net interest margins remained low across the industry, due in part to persistently low interest rates—though the Fed noted that banks have also seen growth in noninterest income, which has helped to compensate for the lack of growth in NIM. Meanwhile, loan demand remained weak overall, and combined with lagging NIMs, drove a decline in banks’ net interest income.

Looking ahead, the Fed flagged cybersecurity and operational resilience as a supervisory priority for large institutions in particular, noting that cyberattacks “have increased significantly since the onset of the COVID event,” particularly those that employ the use of ransomware. The report emphasized the importance of “cyber hygiene,” including IT asset management, vulnerability management and patch management, along with proactively identifying and mitigating cyber threats.

The Fed also said that supervisory activities are beginning to return to pre-COVID approaches, as several pandemic-era flexibilities have been allowed to expire and normal bank examinations resume. Moving forward, the Fed said it intends to adopt a “hybrid” approach to exams, which will involve both on-site and off-site examiners.