Credit, market risks are the key hazards ahead for banks as economy slows, Risk Review predicts

Credit risk, particularly among institutions with concentrations of credit, and market risk with an interest-rate environment presenting earning and funding challenges to banks are the key hazards for banks in the months ahead, especially as the economy slows down, a report issued Tuesday outlines.

In its 2019 Risk Review, the Federal Deposit Insurance Corp. (FDIC) notes that credit and market risk confronting banks come from a variety of sources. On the credit risk side, the report discusses agriculture, commercial real estate, energy, housing, corporate debt, nonbank lending and leveraged lending as the top sources. On the market risk side, the report points to interest-rate risk, deposit competition and liquidity.

The report asserts that U.S. economic growth will slow this year from recent highs as the economy comes off an especially strong 2018. It notes that financial markets, indeed, expect slower growth this year, as reflected by their own increased volatility at the end of last year and early in 2019, after “several years of steady, positive performance.”

Further, tariffs on traded goods reduced U.S. exports this year, and uncertainty about global trade may contribute to slower future growth “if consumers and businesses delay purchase or investment decisions,” the report states. Other factors affecting the outlook include ongoing political risks in Europe and a global economic slowdown that began in 2018, according to the report.

The Risk Review also outlines that slower growth in the broader economy is beginning to take a toll on the banking industry – with loan growth slowing down over the last three years, especially in real estate-related portfolios. Agriculture loan “noncurrent” rates are rising, the report states, amid low commodity prices and farm incomes. “Still, banks held more and higher-quality capital than they did during the financial crisis, in part because of post-crisis regulatory capital requirements,” the report notes.

FDIC Annual Publication Examines Potential Credit and Market Risks