Banks displayed resiliency, stability in face of pandemic – but risks loom ahead, report finds

The banking industry showed both resiliency and stability during the 2020 financial impact of the coronavirus crisis, but credit and market risks remain ahead, according to the 2021 Risk Review released Tuesday by the Federal Deposit Insurance Corp. (FDIC).

“The banking industry remained resilient entering 2021 despite the extraordinary challenges of the pandemic,” the report states. “Strong liquidity and capital levels at the start of 2021 should help to mitigate potential asset quality deterioration across loan portfolios.”

However, the report details, there are risks ahead. In credit risk, the review states, banks are exposed to an array of risks, which intensified as the economic contraction following the pandemic spread. “Banks remained relatively resilient partly because of government support extended to businesses and consumers most affected by the recession,” the report states. “However, institutions with elevated levels of credit exposure to affected sectors are potentially more vulnerable to market disruptions and could present risk management challenges.”

More specifically, the report lists agriculture, commercial real estate, consumer debt, energy, housing, leveraged lending and corporate debt, nonbank financial institution lending, and small business lending as the areas of elevated credit exposure.

On the market risk side, the report affirms that the low interest rates present earnings challenges to banks, even though bank liquidity positions were robust with strong deposit growth in 2020. “Uncertainty in the economy, coupled with a sudden rise in deposits, led many community banks to allocate a higher percentage of assets to readily available liquidity sources,” the report states.

The report points to interest rate risk and net interest margins as key areas to watch going forward. Also, the report acknowledges that bank deposits grew robustly last year, but it indicated that continued growth could stop abruptly. “Sudden changes in depositor behavior as pandemic conditions evolve warrant monitoring,” the report warns.

FDIC 2021 Risk Review