Fed report: Banking industry remains strong amid uncertain economic outlook

The banking industry remained financially sound in the first half of 2022, but banks are starting to take steps for potentially weaker economic conditions, according to the Federal Reserve’s latest supervision and regulation report released today. The Fed noted that the vast majority of firms have maintained capital above regulatory minimums, and that loan delinquencies were historically low while liquidity levels generally remained high. Still, the Fed said, increasing economic uncertainty “may create new risks for firms to manage.”

Despite a modest decline in the first half of 2022, the banking industry’s capital position remains adequate, according to the report. The industry aggregate common equity tier 1 capital ratio was 12.1% at the end of the second quarter, slightly below its five-year average. Loan balances grew in the first three quarters of the year, with robust loan growth across all major loan categories. And in a reversal of a trend that started during the COVID-19 pandemic, loan growth outpaced deposit growth in 2022. The Fed also noted that banks have increased credit loss provisions in the first nine months of the year relative to the same period in 2021 as they build loan loss reserves amid increased economic uncertainty.

The Fed said it will continue to monitor changes in liquidity and capital as well as exposure to leveraged positions in interest rate-sensitive markets. The agency pointed to supervisory guidance issued in August for banks that wanted to engage in cryptoasset-related activities, saying it will continue to work with the OCC and FDIC on policy initiatives on that front. The Fed also noted that starting next year, six of the nation’s largest banks will participate in agency exercises to assess the resilience of financial institutions under different hypothetical climate-related scenarios.