The U.S. banking system remains sound and resilient, with strong levels of capital and liquidity, though the Federal Reserve emphasized a need for vigilance when it comes to monitoring for risk, according to its latest supervision and regulation report released today. As economic uncertainties and rising interest rates persist, the Fed noted that banks are facing heightened credit, liquidity and interest rate risks. Interest rate risk, as well as risks from concentrated funding sources, played a role in the recent failures of three large U.S. banks, the report said.
Liquid assets—including cash and securities—declined in the second half of 2022, the report found. “Significant declines in the fair value of securities, combined with high levels of uninsured deposits, can elevate liquidity risks, as seen with the failure of Silicon Valley Bank,” the Fed said, noting that banks now have access to additional liquidity through the Fed’s new Bank Term Funding Program, which was established in the aftermath of the Silicon Valley Bank and Signature Bank failures.
While loan delinquency rates remain low, the Fed said it anticipates those rates to increase as interest rates continue to remain elevated. “[Commercial real estate] loan performance is also being monitored closely given potential deterioration in the office segment stemming from the trend toward working from home,” the report said. Meanwhile, capital levels remain well above regulatory minimums.