Friday, May 27 2022

United States: FDIC Examines Credit and Market Risks in 2020

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In a 2021 risk review, the FDIC highlighted heightened credit and market risks stemming from the COVID-19 pandemic.

Regarding credit risk, the FDIC noted, among other things, that:

  • FDIC-insured institutions held a record volume of commercial real estate loans at the end of 2020; the agency said the outlook for these loans is uncertain due to the increased prevalence of remote work;
  • the outlook for consumer asset quality is unclear as consumer loan volumes have declined;
  • the increase in the banking sector’s exposure to non-bank financial institutions, in particular with respect to mortgages, has increased the sector’s vulnerability to risks associated with non-bank lending activities; and
  • Although small business closures and bankruptcies did not necessarily lead to credit deterioration in 2020, the long-term impact of the pandemic on the asset quality of small businesses is unclear and continues to be a major source of credit risk for banks.

Regarding market risk, the FDIC noted that (i) banks are facing a low interest rate environment and (ii) economic uncertainty and a sharp rise in deposits have led community banks to allocate a greater percentage of their assets to liquidity.

Primary sources

  1. FDIC Report: 2021 Risk Review

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