The U.S. banking system remains sound and resilient, with strong levels of capital and liquidity, according to the Federal Reserve’s latest supervision and regulation report released today, though supervisory ratings have declined in the large-bank category.
Asset quality remains sound, though delinquency rates from some commercial real estate and consumer loans have increased to above pre-pandemic levels. Banks boosted the allowance for credit losses anticipating further deterioration in asset quality, according to the report. Some banks, the report said, “face challenges navigating changes in depositor behavior, higher funding costs and reduced market values for investment securities.” Earnings have declined as banks increased loan loss provisions and incurred higher funding costs.
Banks increased their reliance on higher-cost wholesale funding sources after falling to historic lows in early 2022. Wholesale funding rose to 21.6% of total assets at year-end 2023, more in line with pre-pandemic levels. Banks improved their operational readiness to access the discount window, the report noted. Since the bank failures in early 2023, the amount of collateral pre-positioned at the discount window has “increased significantly” and is now nearly $3 trillion.
At the end of 2023, two-thirds of large financial institutions—firms with total assets of $100 billion or more—met supervisory expectations with respect to the capital positions and planning or liquidity risk management and positions components. However, supervisors found “weaknesses” in interest rate risk and liquidity risk-management practices at several large institutions, the Fed reported. Some large banks continued to show weaknesses in governance and controls related to operational resilience, cybersecurity and Bank Secrecy Act/anti-money laundering compliance. As a result, only about one-third of large banks had satisfactory ratings across all three rating components. For community and regional banks, most remain in “satisfactory condition,” the report said, however, supervisory ratings downgrades increased due to weaknesses in interest rate and liquidity risk-management practices.
