The FDIC today said that the banking environment improved in 2021 as the economy recovered from a period of economic hardship the year prior. In its annual risk review, the agency noted that financial market conditions “were generally supportive of the economy and banking industry” throughout 2021, though they began to deteriorate with the onset of the Russian invasion of Ukraine in early 2022.
Banks reported “substantially higher net income in 2021, primarily due to lower credit loss provisions,” the agency said, with banks reporting a significant 89.7% increase year-over-year. Meanwhile, net interest margin declined, despite a slight increase in net interest income and strong asset growth, the FDIC noted.
Bank liquidity remained strong in 2021, as the industry saw a record increase in deposits, which “resulted in high levels of cash on bank balance sheets while lending growth remained slow, contributing to higher levels of liquid assets.” While market risk remained moderate overall, the FDIC did caution that rising interest rates “could be a source of risk for banks with substantial exposure to longer-term assets.”
In assessing the key risks to the banking system, the FDIC found that credit conditions generally improved overall in 2021 but flagged various sector-specific challenges that could emerge in the months ahead. Meanwhile, operational risks—including cyber risks and risks related to illicit finance—remain “elevated,” the FDIC said. The agency also flagged climate-related financial risk as an area of emerging risk.