FDIC published the 2019 Risk Review, which highlights emerging risks and exposures in the banking system. This issue of Risk Review provides a summary of conditions in the U.S. economy, financial markets, and banking industry. It also presents key risks to banks in two broad categories—credit risk and market risk. The credit risk areas discussed include commercial real estate, housing, leveraged lending and corporate debt, and non-bank lending. The market risk areas discussed are interest rate risk, deposit competition, and liquidity.
The key highlights of the 2019 Risk Review include the following:
- Commercial Real Estate—Commercial real estate (CRE) market fundamentals remain favorable as the economic cycle matures. However, outstanding commercial real estate loan balances are rising and competition among lenders to maintain market share in the face of slowing loan growth is increasing, posing risk management challenges. FDIC examination findings since mid-2017 noted opportunities for improvement in risk management practices for CRE-concentrated institutions, particularly in the areas of board governance and oversight and portfolio stress testing. Despite the competitive pressures, CRE credit quality metrics at insured institutions remain satisfactory in early 2019.
- Housing—The housing market began to slow in 2018 as concerns about affordability intensified. Banks with concentrations in this portfolio could be vulnerable to the slowdown, but credit quality has been resilient so far. Among FDIC-insured institutions, the condition of the residential mortgage portfolio is favorable, but some banks report significant loan concentration levels and increased competition.
- Leveraged Lending and Corporate Debt—Corporate bonds and leveraged loans have become increasingly risky, as the share of low-rated bonds has grown and lender protections in leveraged loans have deteriorated. Direct bank exposure to corporate debt risks is concentrated in funded and unfunded revolving leveraged loans and mortgages, while indirect exposures are opaque.
- Non-bank Financial Institution Lending—Banks are exposed, directly and indirectly, to non-banks. This includes direct lending to nonbank financial institutions. By lending to non-depository financial institutions, banks are increasingly accruing direct and indirect exposures to these institutions and to the risks inherent in the activities and markets in which they engage.
- Interest Rate Risk and Deposit Competition—The current interest rate environment presents earnings and funding challenges to banks. Rising rates and deposit competition have begun pushing deposit costs higher and are affecting the mix of deposits, particularly at non-community banks. Most banks continue to report net interest margin growth, but banks with rising funding costs and a high proportion of long-term assets may face near-term margin pressure.
- Liquidity—Short-term liquidity at smaller banks has declined in recent years, potentially reducing these institutions’ ability to manage a future downturn.
Keywords: Americas, US, Banking, Risk Review, Credit Risk, Market Risk, Interest Rate Risk, Liquidity, Commercial Real Estate, Leveraged Lending, FDIC
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