Fed report: Banking system remains strong, assessing of fintech risk ramps up

The banking system remained strong overall, with robust capital and liquidity and improved asset quality in the second half of 2021, according to the Federal Reserve’s latest supervision and regulation report released today. The Fed said that risk monitoring will continue for potential effects of the pandemic and new geopolitical risks, including Russia’s invasion of Ukraine.

The banking industry ended 2021 with strong capital positions, the report noted. Since the pandemic began, the industry has added nearly $230 billion in additional common equity tier 1 capital, providing support for lending and a buffer against losses. Strong deposit growth has spurred the increase in liquid assets and allowed banks to reduce their reliance on more volatile forms of funding. Bank profitability declined in the last three quarters of 2021 but remains sound and comparable with pre-pandemic levels, the report said. The decline was due to reduced benefits from negative provision expense and lower trading income at large banks.

The Fed said that it will continue to focus on capital and liquidity management, as well as cybersecurity. The Fed is also reviewing the risks created by the increasing use of technology by financial institutions and is enhancing its supervisory approaches to respond to these risks.

“Banks are expected to ensure appropriate controls are established to support new fintech products and services,” the Fed wrote. “As banks engage in these activities, they should develop and implement risk-management practices and controls at a pace that aligns with their growth.”

The report noted that while all sized of banks have embraced fintech, the approaches to adopting it vary across banking segments. The Fed has established a System Fintech Supervisory Program to assess the range of fintech risk. The program is developing a “coordinated supervisory strategy” that will be tailored to a bank’s size and complexity. The report also noted that U.S. banks have heightened their cyber defenses in response to geopolitical tensions.