Report finds banks remain resilient as economy cools

Financial conditions have tightened further since January but the U.S. banking system remains sound and resilient, the Federal Reserve said today in its semiannual Monetary Policy Report to Congress. The report noted the recent bank failures, which it said came about as a result of heavy reliance on uninsured deposits, declining fair values of long-duration fixed-rate assets due to rising interest rates, and poor risk management practices at the banks that failed. “However, the broader banking sector maintained substantial loss-absorbing capacity and ample liquidity,” the report said.

The report said that growth in the first quarter of this year was modest as consumer financing conditions tightened, consumer confidence remained low and real business fixed investment growth slowed. Activity in the housing sector continued to contract in response to elevated mortgage rates, but existing and new home sales have edged up while house prices appear to be increasing again.

Growth in banks’ total loan holdings slowed to about a 5% annualized rate in Q1, down from a 9% rate in the previous quarter, reflecting the effects of higher interest rates, tighter credit availability and economic uncertainty, according to the report. Delinquency rates on bank loans remained near historical lows despite increasing for consumer and real estate–backed loans. Bank profitability remained robust although net interest margins edged down because of higher funding costs. Still, the report noted that bank equity prices declined as a result of market reaction to the bank failures.