WASHINGTON–Banking regulators are “redoubling their efforts” to assess the banking industry’s preparedness for a number of emerging risks, according to the Federal Reserves’ semi-annual Supervision and Regulation Report.
The report examines emerging credit, liquidity, and interest rate risks in the wake of rising interest rates, declining securities values, which were the primary drivers behind the recent failure of three large, regional banks.
The report was released in conjunction with congressional testimony by Federal Reserve Board Vice Chair Michael Barr.
While the banking industry is “resilient,” as Barr said several times during his testimony earlier this week, the report stated that “recent stress” in the banking system “shows the need for us to be vigilant as we assess and respond to risks.”
The report covers the period from late 2022 through May of 2023. The Fed said that in 2022 it began preparing for a more challenging economic environment for banks.
‘Additional Examination’
“In view of unprecedented growth of deposits during the pandemic and questions about how depositors would react to more adverse conditions, supervisors focused on assessing firms’ ability to manage risks related to liquidity,” the report states. “Supervisors also undertook additional examination work to evaluate interest rate risks and the impact on firms’ funding options. Declines in the fair value of investment securities have led to pressures on liquidity and capital at some banks, necessitating updates to contingency funding plans.”
The Fed report also stated its supervisors have increased efforts to gauge banks’ credit risk exposure, paying attention to regional and community banks’ commercial real estate lending.
Key Points
Other key points made in the report:
- The recent failures of three large U.S. banks (Silicon Valley Bank, or SVB, of Santa Clara, Calif.; Signature Bank of New York, N.Y.; and First Republic Bank of San Francisco) “have also demonstrated the risks of concentrated funding sources and poor management of interest rate risks.”
- As interest rates have risen, fair values of investment securities have declined significantly.
- Deposit costs have also increased from low levels, and firms are turning to wholesale borrowings to address emerging funding needs.
- Delinquency rates for some loan segments have started to increase from the low levels seen over the past several years.
- Banks have increased provisions for credit losses in anticipation of asset quality deterioration.
The full report can be found here.