Federal Reserve’s Supervision and Regulation Report Covers COVID-19 Banking Conditions
Did you know that the Federal Reserve publishes a semiannual Supervision and Regulation report? This report is published in April and November of each year and provides information about banking conditions, risks that banking institutions face and supervisory developments. The report utilizes information provided from regulatory reporting data to discuss issues most important to institutions over the past year. The inaugural report was published in 2018 and the release typically aligns with public testimony to Congress from the vice chair for Supervision. The report aims to increase transparency and inform the public about the Federal Reserve’s efforts to promote a safe and sound banking system.
In the latest November 2021 report, much of the analysis focuses on banking conditions as the economy continues to recover from the COVID-19 pandemic. Despite the financial and economic hardships caused by COVID-19, overall banking conditions remained stable and are improving from a capital, liquidity and supervisory rating perspective. Structural changes first enacted in response to the Great Recession helped banks navigate the uncertainty of the pandemic with fewer concerns about their financial health. These included more robust capital planning and stress testing. Most banks entered the pandemic well capitalized. In fact, earnings growth over the past several years has allowed Fifth District banks to build capital to the highest levels since 2006. In the first half of 2021, average capital metrics reported by banks were higher than those reported prior to the COVID-19 pandemic. Lower levels of loan delinquency and increases in bank profitability indicate improving financial conditions. Developments in loan growth are mixed. While there are potential signs of emerging loan growth, overall loan growth across banking remains weak. Liquidity has improved over 2021, with bank deposits increasing by approximately $1 trillion in the first half of 2021. Bank profits have recently surpassed pre-pandemic levels after initial concerns at the onset of the pandemic. While the long-term effects of the pandemic are still unclear, current data on banking conditions suggest that banks have been a source of strength for the economy as it has weathered this health crisis.
In addition to addressing general banking conditions, the report also provides a useful reference around recent regulatory and supervisory developments. Tables within the report provide quick references of recent regulatory rulemaking and statements. Upcoming supervisory priorities include assessing financial institutions financial and operational resiliency to the challenges faced by their customers and local communities. The most recent Supervisory report summarizes work around innovation and third-party partnerships. In the third quarter of 2021, three documents around third-party risk management, due diligence on financial technology companies and community bank innovation all were released by Federal Reserve staff. These documents are intended to reinforce the Federal Reserve’s position that banks can responsibly innovate while also providing some clarity around expectations on any partnerships with non-bank companies that occur to ensure the safety and soundness of institutions and the protection of consumers.
If you are curious about what the Federal Reserve System supervision continues to focus on, grab the most recent copy of this Supervision and Regulation public report to learn more. If you’re a state member bank supervised by the Federal Reserve Bank of Richmond and would like to learn more about this report, reach out to your portfolio central point of contact.
