Executive Summary

The U.S. banking system is sound and resilient, with strong capital and liquidity. At the same time, recent stress in the banking system shows the need for us to be vigilant as we assess and respond to risks. The recent failures of three large U.S. banks have also demonstrated the risks of concentrated funding sources and poor management of interest rate risks. As interest rates have risen, fair values of investment securities have declined significantly. Deposit costs have also increased from low levels, and firms are turning to wholesale borrowings to address emerging funding needs. Delinquency rates for some loan segments have started to increase from the low levels seen over the past several years. Banks have increased provisions for credit losses in anticipation of asset quality deterioration. Accordingly, supervisors are redoubling their efforts to assess banks' preparedness for emerging credit, liquidity, and interest rate risks.

During 2022, Federal Reserve supervisors began preparing for the increased possibility of a more challenging economic environment for banks. In view of unprecedented growth of deposits during the pandemic and questions about how depositors would react to more adverse conditions, supervisors focused on assessing firms' ability to manage risks related to liquidity. Supervisors also undertook additional examination work to evaluate interest rate risks and the impact on firms' funding options. Declines in the fair value of investment securities have led to pressures on liquidity and capital at some banks, necessitating updates to contingency funding plans. Federal Reserve supervisors have also increased efforts to evaluate banks' credit risk exposure, with particular attention being focused on regional and community banks' commercial real estate lending.

This report focuses on developments in three areas:1

  1. Banking System Conditions provides an overview of the financial condition of the banking sector.
  2. Regulatory Developments outlines the Federal Reserve's recent regulatory policy work.
  3. Supervisory Developments highlights the Federal Reserve's current supervisory programs and priorities.

References

 1. Generally, data in this report are as of year-end 2022. Return to text

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Last Update: May 23, 2023