The Board of Governors of the Federal Reserve System (FED) published a report that summarizes banking conditions in the United States, along with the supervisory and regulatory activities of FED. This semiannual report highlights that, in the first half of 2021, banking conditions continued to improve from the already strong position in 2020, with banks continuing to report robust levels of capital and liquidity. Capital ratios were above regulatory requirements at nearly all banks, providing a buffer against losses and support for lending. Early signs of loan growth emerged, the loan delinquency rate fell, bank profitability increased, and loans in forbearance declined. However, the average net interest margin in the banking sector remains low.
Meanwhile, the report also mentions that loan growth has been weak overall, even if early signs of loan growth are emerging. Total loans grew through May 2020, boosted by commercial and industrial loan commitment drawdowns and Paycheck Protection Program (PPP) loan originations, but then declined 5% in the last half of 2020. However, the decline in loans stabilized in early 2021 and some signs of growth have emerged. Total loan balances were flat in the first quarter of 2021 but have increased slightly since. Consumer loans and residential real estate loans, which were a drag on total loans in 2020, recently turned higher and commercial real estate loans have continued to rise. All consumer loan categories rose in the second quarter of 2021, leading total consumer loans to increase 3% from the prior quarter.
The findings indicate that commercial real estate loans warrant continued monitoring. The impact of pandemic on commercial real estate loan performance has been softened by the governmental response. However, concerns remain about the future performance of commercial real estate properties. Banks are a critical funding source of commercial real estate debt and held approximately half of the USD 5 trillion total loans outstanding to the U.S. commercial real estate market at the end of the second quarter of 2021. Supervisors have observed that banks have been actively monitoring commercial real estate loans and downgrading them appropriately. Banks worked with their commercial real estate borrowers and granted loan modifications. As the economy and the commercial real estate market continue to recover, FED encourages banks to maintain sound underwriting standards. FED plans to closely monitor commercial real estate loans and will remain focused on higher risk properties; it will also focus on monitoring banks that hold higher concentrations of loans secured by commercial real estate.
Keywords: Americas, US, Banking, Lending, Commercial Real Estate, Regulatory Capital, Credit Risk, COVID-19, Basel, SMEs, FED
Previous ArticleEBA Publishes Standards to Calculate Risk-Weights of CIUs Under CRR
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
The use cases of generative AI in the banking sector are evolving fast, with many institutions adopting the technology to enhance customer service and operational efficiency.
As part of the increasing regulatory focus on operational resilience, cyber risk stress testing is also becoming a crucial aspect of ensuring bank resilience in the face of cyber threats.
A few years down the road from the last global financial crisis, regulators are still issuing rules and monitoring banks to ensure that they comply with the regulations.
The European Commission (EC) recently issued an update informing that the European Council and the Parliament have endorsed the Banking Package implementing the final elements of Basel III standards
The Swiss Federal Council recently decided to further develop the Swiss Climate Scores, which it had first launched in June 2022.