FDIC Publishes Risk Review Report for 2019
FDIC published the updated Risk Review for 2019, providing a summary of the risks that ultimately may affect FDIC-insured institutions and the Deposit Insurance Fund of FDIC. The 2019 report summarizes conditions in the U.S. economy, financial markets, and banking industry. The report presents key risks to banks in two broad categories: credit risk and market risk. Among the credit risk areas discussed are commercial real estate, energy, housing, leveraged lending and corporate debt, and nonbank lending. Market risks discussed in the report include interest rate risk, deposit competition, and liquidity.
Much of the discussion focuses on risks that may affect community banks. As the primary federal regulator for the majority of community banks in the United States, FDIC is well-positioned to discuss risks that may affect the U.S. banking system, and community banks in particular. The report reveals that the FDIC-insured institutions performed well in 2018. The strong financial condition of banks contributed to a declining number of institutions on the Problem Bank List and no bank failures during the year. Loan growth has slowed over the past three years, particularly in real estate-related portfolios. In addition, agriculture loan noncurrent rates are rising amid low commodity prices and farm incomes. Still, banks held more and higher-quality capital than they did during the financial crisis, in part because of post-crisis regulatory capital requirements.
In terms of credit risk, after ten years of economic growth, loan performance metrics at FDIC-insured banks remain strong. However, institutions with concentrations of credit have greater exposure to market sector changes. Competition among lenders has increased as loan growth has slowed, posing risk management challenges. Market demand for higher-yielding leveraged loan and corporate bond products has resulted in looser underwriting standards. By lending to nondepository 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. Bank lending to nondepository financial institutions, which is primarily driven by noncommunity banks, has expanded seven-fold since 2010 and now exceeds USD 400 billion. The report also shows that short-term liquidity at smaller banks has declined in recent years, potentially reducing these institutions’ ability to manage a future downturn. A turn in the credit cycle could be detrimental to institutions with lean liquidity positions.
Furthermore, consolidation within the banking industry accelerated in 2018. The pace of net consolidation rose in 2018 for the first time since 2015 and remains relatively high by historical standards. Net consolidation is primarily driven by voluntary inter-company mergers. In 2018, 230 charters were merged out of existence and seven were acquired by credit unions. Consolidation activity was partially offset by new chartering activity: eight newly chartered and insured institutions were established in 2018, the most since 2010. Community banks continue to report lower consolidation rates than noncommunity banks. When acquisitions have occurred, community banks have typically been acquired by other community banks.
Related Link: Risk Review for 2019
Keywords: Americas, US, Banking, Risk Review, Credit Risk, Market Risk, Liquidity Risk, Interest Rate Risk, FDIC
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