Despite some declines in fixed-rate assets, banks doing well, Fed reports; agency continues to watch CRE, consumer lending

Despite some banks seeing “sizeable declines” in the fair value of some of their fixed-rate assets because of interest rate increases, the nation’s banks are sound overall, and most banks continue to report capital levels above regulatory requirements, the Federal Reserve said late Thursday in its semiannual Supervision and Regulation Report.

In the report, the agency contends that recent earnings performances at banks have been tracked at pre-coronavirus pandemic levels. Returns on average assets and equity for the first half of 2023, the Fed said, exceeded 10-year averages.

“Overall, banks have ample liquidity and limited reliance on short-term wholesale funding,” the Fed said. “Loan delinquencies are rising in some segments but are still low.”

However, the agency did indicate it is monitoring closely two key areas for “potential credit deterioration”: commercial real estate (CRE) and consumer lending.

The agency also noted it has taken steps to enhance its supervision in the wake of the failure of three large banks – Silicon Valley Bank (SVB) of Santa Clara, Calif., Signature Bank of New York, N.Y., and First Republic Bank of San Francisco) – last spring. These steps, the agency said, reflect “lessons learned” from the failures and, in particular, Federal Reserve supervision of SVB.

The Fed said those steps include improving its supervision of liquidity and interest rate risks by conducting targeted reviews at banks exhibiting higher interest rate and liquidity risk profiles. The agency said it is also conducting focused training and outreach on supervisory expectations for interest rate and liquidity risk management for banks and examiners.

“The Federal Reserve is committed to taking additional steps to strengthen its supervisory efforts,” the agency said.

Federal Reserve Supervision and Regulation Report