The banking sector remains sound and resilient overall, and most banks continue to report capital levels well above regulatory requirements, the Federal Reserve said in its first Financial Stability Report of 2025. Still, the report noted that fair value losses on fixed-rate assets remained sizable for certain banks, while some banks continued to have concentrated exposures to commercial real estate loans.
At the end of 2024, measures of bank profitability continued to improve and were around the median of their historical distributions, the Fed said in the report. Also, banks’ average interest rate on interest-earning assets remained well above the average interest rate paid on liabilities, supporting net interest margins. Earnings for the largest banks were robust in the first quarter of 2025, though early earnings calls highlighted elevated economic uncertainty and downside risk, with some banks increasing loan-loss reserves to buffer against a potential increase in defaults, it said.
Delinquency rates for commercial and industrial and CRE loans increased slightly in the second half of 2024, while delinquency rates for credit card and auto loans were little changed and remained above their pre-COVID levels, the Fed said. The report noted that banks’ CRE portfolios have a sizable share of loans backed by office and multifamily properties where weaker fundamentals have begun to show some signs of improvement. “Banks have actively managed their CRE exposures by modifying loan terms, which has reduced delinquency rates,” it said.
