A top US banking regulator painted a mixed but more stable picture of the industry at midyear following 2023’s early turmoil, while flagging potential risks from rising interest rates, tighter credit and a shaky office real estate market.
(Bloomberg) — A top US banking regulator painted a mixed but more stable picture of the industry at midyear following 2023’s early turmoil, while flagging potential risks from rising interest rates, tighter credit and a shaky office real estate market.
The Federal Deposit Insurance Corp.’s watch list of the weakest lenders stayed unchanged in the second quarter at 43, the agency said Thursday in its Quarterly Banking Profile of the 4,645 firms it insures. The period was marked by the collapse of First Republic Bank after a rapid increase in interest rates devalued its holdings. Its demise followed the implosions of Signature Bank and Silicon Valley Bank in March.
“Despite the period of stress earlier this year, the banking industry continues to be resilient,” FDIC Chair Martin Gruenberg said in a statement. “Net income remained high by historical measures, asset quality metrics were stable, and the industry remained well-capitalized.”
Looking ahead, he said banks are being buffeted by inflation, higher interest rates and geopolitical uncertainty. The FDIC is scrutinizing commercial real estate, especially in office markets, and monitoring pressure on funding levels and net interest margin.
Rising rates and inflation could lead to a weakening of credit quality, which might result in further tightening of loan underwriting, Gruenberg said. His remarks echoed what bankers told the Federal Reserve in its July survey of senior loan officers, which found banks already raising standards on a wide range of consumer and business loans, with more tightening planned for the year’s second half.
Collectively, net income at FDIC-insured lenders climbed 10% to $70.8 billion in the recent quarter from a year earlier, though it fell 11% from 2023’s first quarter. Gruenberg said comparisons were skewed by accounting for takeovers of failed banks. With those factored out, profits remained almost flat at relatively high levels, he said.
Deposits Wane
Total deposits were down for the fifth consecutive quarter, but less than 1% compared with the first three months of the year, driven by decreases in uninsured deposits.
Some of the biggest banks initially reported big inflows of new deposits amid the turmoil earlier this year as worried customers fled smaller lenders. But Gruenberg said even the industry’s giants ultimately saw outflows as customers sought richer yields from higher-paying alternatives, such as money-market funds.
The FDIC said that the amount of money in its bedrock insurance fund rose to $117 billion on June 30, up $897 million from the end of the first quarter. The regulator dipped into the fund during the previous quarter to make all depositors whole at SVB and Signature Bank and has proposed a measure to help replenish the fund by charging banks a special assessment.
Banks were thrown into disarray early this year in part because rising interest rates cut the value of bonds that they bought when rates were low, leaving them with mounting paper losses. The tally of unrealized losses on securities increased in the quarter 8.3% to $588 billion, but the bulk of the holdings are classified as investments that will be kept until they mature, implying that no actual damage will occur from them unless some new upheaval forces the banks to sell.
(Updates with plans for tighter lending standards, data on unrealized losses, starting in the fifth paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.