Fed: Banking system in good shape, pandemic challenges remain

The banking system improved in the first half of 2021 and remains strong despite pandemic-related challenges, according to the Federal Reserve’s most recent semiannual 2021 supervision and regulation report

Those findings come as banks continue seeing robust levels of capital and liquidity. As of July, banks had seen a record increase of deposits since the beginning of 2020, up about $4 trillion or 27 percent. Also, consumer loans jumped 3 percent from 1Q 2021, the loan delinquency rate fell, bank profitability grew, and loans in forbearance dropped. Though pandemic-related shutdowns and social distancing requirements strained commercial real estate properties, few banks have reported problems with CRE loans, and delinquencies remain low. The Federal Reserve found that the government’s response to the pandemic softened the impact on the market. Commercial and industrial loans fell in the second quarter, driven by Paycheck Protection Program loan forgiveness. For community banks, the balance of loans modified due to Covid-19 fell from $205 billion as of 2Q 2020 to $45 billion one year later. For regional banks, those balances fell from $163 billion to $21 billion. 

Banks saw approximately $1 trillion more deposits in the first half of 2021 than the previous year, and continued to invest those funds in cash and securities. The vast majority of community and regional banks have capital ratios above well-capitalized minimums. Banks saw early signs of loan growth during the pandemic, along with falling delinquencies and forbearances, according to the Fed. 

However, concerns remain over the banking sector: Loan delinquency rates could increase in some sectors, especially if Covid-19 continues and weakens the economic recovery. Loan demand remains weak. The Fed cited cybersecurity and operational resilience as two supervisory priorities, especially with the increase in reported ransomware cyberattacks since the onset of Covid-19.