WASHINGTON–Even as delinquency rates for some commercial real estate (CRE) loans and certain consumer loans are now above pre-pandemic levels, most banks are building capital and liquidity levels above regulatory requirements, the Federal Reserve said in a new report.
The Fed’s “Supervision and Regulation Report reported banks have increased their allowance for credit losses ahead of expected declines in asset quality, such as with loan delinquencies.
The report also found aggregate commercial bank deposit levels stabilized during the second half of 2023 and slightly increased in the early part of 2024.
The Findings
Among the other findings in the Fed report:
- Regulatory capital increased in 2023, with banks adding $76 billion in common equity tier 1 (CET1) capital between year-end 2022 and year-end 2023, an increase of nearly 50 basis points.
- Loan growth at banks in 2023 was still positive but has slowed from the “rapid pace” of the previous year. “Both weaker loan demand and tighter lending standards contributed to the slowdown, resulting in modest loan growth in most sectors last year,” the Fed said. “A major exception were credit cards, with balances reaching a historic high at year’s end despite tightened lending standards and fewer credit line increases at large banks.”
- Delinquency rates are rising in CRE and some consumer sectors. The Fed reported delinquencies for CRE loans increased to 0.9%, a five-year high. Meanwhile, consumer loan delinquencies were more than 1% for the first time since the first quarter of 2020.
A Primary Driver
“The rise in CRE delinquencies was largely due to loans secured by nonowner-occupied nonfarm nonresidential properties in banks with at least $100 billion in total assets,” the report states. “Nonowner-occupied nonfarm nonresidential properties include hotels, offices, retail stores, warehouse facilities, and other types of business property used as collateral.
“At the large banks, office loans showed the greatest delinquency rate increase among property types, particularly in metropolitan areas,” the report continued. “Reduced demand for office space and higher interest rates adversely affected office loan performance. While banks with total assets of less than $100 billion have lower CRE delinquency rates than large banks, they have a greater percentage of their total loans exposed to the CRE sector.”
The full report can be found here.
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