Despite rising delinquency rates – especially in CRE and consumer loans – banks building capital, Fed report finds

Although delinquency rates for some commercial real estate (CRE) loans and some consumer loans have increased to above pre-pandemic levels, most banks are building capital and liquidity levels above regulatory requirements, according to a report issued by the Federal Reserve Friday.

In its Supervision and Regulation Report, the Fed said that banks have increased their allowance for credit losses in anticipation of further deterioration in asset quality, such as with loan delinquencies.

The report also notes that aggregate commercial bank deposit levels stabilized in the second half of 2023 and slightly increased early this year.

The Supervision and Regulation Report is published semiannually by the Fed, the agency said, to “inform the public of current banking conditions as well as provide transparency about its supervisory and regulatory policies and actions.”

Among the details included in the report are:

  • Regulatory capital increased in 2023, with banks adding $76 billion in common equity tier 1 (CET1) capital between year-end 2022 and year-end 2023, an increase of nearly 50 basis points.
  • Loan growth at banks in 2023 was still positive but has slowed from the “rapid pace” of the previous year. Both weaker loan demand and tighter lending standards contributed to the slowdown, resulting in modest loan growth in most sectors last year, the Fed said. A major exception were credit cards, with balances reaching a historic high at year’s end despite tightened lending standards and fewer credit line increases at large banks.
  • Delinquency rates are rising in CRE and some consumer sectors. Delinquencies for CRE loans increased to 0.9%, a five-year high. Meanwhile, consumer loan delinquencies were more than 1% for the first time since the first quarter of 2020.

“The rise in CRE delinquencies was largely due to loans secured by nonowner-occupied nonfarm nonresidential properties in banks with at least $100 billion in total assets,” the Fed said in the report. Nonowner-occupied nonfarm nonresidential properties include hotels, offices, retail stores, warehouse facilities, and other types of business property used as collateral, the Fed noted.

“At the large banks, office loans showed the greatest delinquency rate increase among property types, particularly in metropolitan areas,” the Fed said. “Reduced demand for office space and higher interest rates adversely affected office loan performance. While banks with total assets of less than $100 billion have lower CRE delinquency rates than large banks, they have a greater percentage of their total loans exposed to the CRE sector.”

Federal Reserve Supervision and Regulation Report: May 2024

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