Fed report: Banks resilient in face of financial market pressures

Banks appear to be weathering the current mix of financial market pressures well, according to the Federal Reserve’s semiannual monetary policy report to Congress released today. “Financial market stresses do not appear to have exacerbated the negative effects on broader economic activity or created substantial pressure on key financial intermediaries, including banks,” the report noted.

“Despite experiencing a series of adverse shocks—higher-than-expected inflation, the ongoing supply disruptions related to COVID-19 and Russia’s invasion of Ukraine—the financial system has been resilient,” according to the Fed. The growth of bank loans to businesses picked up and business credit quality has remained strong, reflecting stronger loan originations as well as a moderation in loan forgiveness associated with the Paycheck Protection Program, the report said.

Bank credit expanded in the first quarter due to strong loan demand. Growth was “broad based,” the Fed said, with balance growth accelerating for most major loan categories. Growth was strongest for commercial, industrial and credit card loans. Loan growth moderated somewhat in May amid higher rates and a more uncertain economic outlook but remained strong. Bank profitability also remained strong but fell somewhat in the first quarter, in part, from declines in investment banking revenue. In the near term, the Fed said, higher interest rates and strong loan demand are expected to support bank profitability, adding that delinquency rates on bank loans remained low.

Large-bank capital ratios dipped in the first quarter, but overall leverage in the financial sector appears “moderate and little changed” this year, the Fed reported, noting that funding risks at domestic banks are low and that banks relied “modestly” on short-term wholesale funding and the share of high-quality liquid assets at banks remained historically high.