Financial conditions have tightened since June 2022 and are significantly tighter than a year ago, and while banks have seen some slowdown in revenue growth, the sector remains strong overall, the Federal Reserve said today in its semiannual Monetary Policy Report to Congress. The report noted that the pace inflation has slowed somewhat recently but remains high, particularly food price inflation. As for the financial sector, risk-based capital ratios at banks declined “a touch” last year but remain well above regulatory requirements. Funding risks at domestic banks and broker-dealers remain low, and large banks continue to have ample liquidity.
The Fed said that business loans at banks continued to grow in the second half of last year but decelerated during the fourth quarter. “Bank profitability in the second half of 2022 remained robust overall, driven by strong net interest income, but revenues and earnings in the fourth quarter were generally weaker, particularly among banks with a greater share of income derived from investment banking activities,” the agency said. “Bank equity prices increased moderately, on net, in line with broader equity price indexes.”
Delinquency rates on bank loans remained low in Q4 relative to historical averages, the agency said. “However, loan loss provisions have increased in recent quarters, consistent with banks’ expectations for credit losses to increase in the future, and delinquency rates rose slightly last year for some loan types such as credit cards and auto loans.”