Fed: Banks Continue to be Profitable and Strongly Capitalized

Banks continued to be profitable and strongly capitalized as structural vulnerabilities persist in some types of money market funds, the Federal Reserve said in its latest financial stability report released today. The Fed noted that capital ratios remained well in excess of regulatory requirements.

The credit quality of bank loan portfolios continued to improve broadly over the first half of the year, the report states, as the economic outlook improved and with “significant monetary and fiscal support” including forbearance programs, expanded unemployment benefits and the Paycheck Protection Program.

However, the report noted that structural vulnerabilities persist in some types of money market funds and other cash-management vehicles as well as in bond and bank loan mutual funds, adding that there are also funding-risk vulnerabilities in the growing stablecoin sector.

Bank lending to financial institutions operating outside the banking sector continued to increase notably in terms of both committed and utilized amounts, the report noted. Committed amounts of credit from large banks to nonbank financial institutions grew above pre-pandemic levels in the first half the year, driven by real estate lenders and lessors; special purpose entities, collateralized loan obligations and asset-backed securities; open-end investment funds; and other financial vehicles.

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