WASHINGTON–The nation’s banking system remains strong overall, but there remain risks around cybersecurity, prime brokerage services and credit, in addition to other emerging issues, according to a new report from the Federal Reserve.
The Fed said its Supervision and Regulation report for May 2022 found the banking system has very strong capital and liquidity, and asset quality remains strong, and that banks performed well during the second half of 2021, even with pressure on net interest margins (NIMs), and loans expanding.
Areas where the Fed says it has concerns include cybersecurity, especially among the largest FIs.
“Cyber threats and attacks increased with the onset of the pandemic and are an increasing concern resulting from geopolitical unrest,” the Federal Reserve stated in the report. “Increasing ransomware attacks are a risk in the financial sector.”
The Fed said it also continues to review risks related to the increasing the use of technology by financial institutions, and in response the Fed said it is enhancing its supervisory approaches.
Report Highlights
Other highlights of the report:
- The Fed said interagency examinations will continue during 2022, with focus on two areas: review of controls that are in place to manage access to a firm’s systems and information, and review of a firm’s processes and tools used to detect and respond to ransomware attacks.
- Prime brokerage services pose significant liquidity and credit risks. “These risks are heightened by the complexity of prime brokerage services and lack of transparency into the trading and investing activities of the investment fund clients, particularly trading activities with other counterparties,” the report stated.
- Liquidity shortfalls and credit losses from prime brokerage activities occurred during the financial crisis of 2007–08, and since that time the services have only grown in complexity, resulting in other risk-management failures. It cited the default of Archegos Capital Management as one example of gaps in bank risk management.
- For community (and regional) banking organizations (CBOs and RBOs), the Fed pointed to two risks: credit and operational. Though the report points out that neither risk has yet resulted in specific issues, “uncertainties continue to persist.”
- The Fed said its examiners have noted that credit risk may be increasing at community and regional banks because of their exposure to certain sectors particularly affected by the pandemic.”
The full report is here: Federal Reserve Supervision and Regulation Report, May 2022
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