Elevated interest rate risk was the top peril for banks in 2025, the federal bank deposit insurance agency said Thursday, but a changing interest rate environment gave the institutions better net interest margins (NIMs), according to the annual risk review issued by the agency.
According to the 2026 Risk Review published by the Federal Deposit Insurance Corp. (FDIC), which covers the previous year, lower interest rates in 2025, particularly on the short end of the yield curve, helped reduce funding costs. A steeper yield curve helped improve NIMs, the agency said.
However, the agency stated, unrealized securities losses remained elevated for banks last year, even though they “eased” from 2024.
The review identifies credit risk as the second biggest risk banks faced last year, with commercial real estate (CRE) showing continued weakness.
The report noted that CRE loan portfolios grew “modestly,” reaching their highest in 2025. At the same time, CRE delinquency rates – and net charge-off ratios – were low. However, the report stated, “CRE loan concentration and delinquency rates were uneven across bank groups,” the report stated. “Mounting operating costs, elevated interest rates, and vacancy rates challenged some borrowers’ ability to refinance and repay CRE debt.”
The FDIC said, to provide relief for borrowers, banks used loan modifications to provide relief, often at larger banks. It said conditions in some property markets did stabilize.
In other areas, the report found in 2025:
- The category of bank loans to non-depository financial institutions (NDFIs) was among the fastest-growing lending segments. It was heavily concentrated at the largest banks, with some of the growth driven by banks reclassifying loans across categories.
- Small business loan growth was weak amid higher financing costs and weaker business conditions. Bank exposures to larger businesses through corporate bond holdings increased, while collateralized loan obligations (CLOs) declined.
- Consumer loan growth was mixed as households reduced demand for some loans and banks continued to tighten lending standards. Consumer loan asset quality held steady, but delinquency rates were elevated, particularly for autos and credit cards.
- In residential real estate, the agency said credit quality for 1–4 family residential loan portfolios remained sound, but some banks reported elevated past-due and nonaccrual (PDNA) rates. The report said higher mortgage rates weighed on the housing market. While home price growth moderated, high prices and elevated housing costs persisted in many markets.
- In ag lending, lending conditions weakened, the report stated, as with grain and oilseed farmers reporting operating losses as crop receipts declined for the third consecutive year, while production expenses stayed high. Operating losses eroded working capital positions for many farmers, leading to strong loan demand. Farm bank agricultural loan delinquency rates increased.
Leave a Reply