The banking system over the past few months has remained sound and resilient, with risk-based capital ratios well above regulatory requirements, the Federal Reserve concluded in the first of its two financial stability reports for 2024. The report, released today, offers the Fed’s assessment of the resilience of the U.S. financial system since October 2023, when the previous report was issued. While the Fed found the overall banking system sound, it noted fair value losses on fixed-rate assets remained sizable for some banks, and some banks have concentrated exposures to loans backed by commercial real estate.
The Fed also noted that amid rising interest rates over the past two years, the profitability of the banking sector stayed solid. Banks’ average rates on interest-earning assets remained well above the average interest expense rates on liabilities, according to the report. “That said, interest expenses increased somewhat faster than interest income, reflecting a higher share of interest-bearing deposits on banks’ balance sheets and somewhat higher deposit rates,” it said. “As a result, net interest margins, which measure banks’ yield on their interest-earning assets after netting out interest expenses, declined a notch in the aggregate in 2023.”
In addition, the report provided an overview of the Bank Term Funding Program, which was established after the failures of Silicon Valley Bank and Signature Bank to provide an additional source of liquidity for depository institutions. Credit extended through the BTFP increased at a rapid pace initially, reaching a level above $60 billion by the end of March 2023, before slowing and surpassing $100 billion by the end of August 2023. Outstanding balances increased further in late 2023, surpassing $165 billion before gradually declining in early 2024, according to the report. The BTFP ceased extending new loans on March 11. The program extended advances to 1,804 depository institutions, of which 1,706, or 95%, were small institutions with total assets below $10 billion.
