The banking system remains strong, but cybersecurity challenges and falling market conditions signal trouble could be on the horizon, according to the Federal Reserve’s most recent Supervision and Regulation Report.
The banking system’s average market ratio, which signals a firm’s capital position, hit its lowest level in more than a year in March, the report stated. Credit default swaps also recently increased to their highest level since the spring of 2020.
The Fed attributes the heightened risk environment for banks to the war in Eastern Europe. They see community banks as lacking the IT infrastructure to combat any ransomware attacks, which are possible as Russia looks to retaliate against the U.S. for sanctions levied in response to the invasion. “U.S. banks’ direct financial exposures to Russia and Ukraine appear limited and manageable,” the Fed stated. “Indirect exposure through market volatility, such as the recent volatility in commodities markets, has had limited impact on U.S. banks to date. U.S. banks are well-capitalized and have substantial liquidity buffers to withstand the increased volatility and potential for losses.”
According to the Fed, community and regional banks face greater risk than larger institutions because of their exposure to the commercial real estate market, which continues to be adversely impacted by the pandemic. Still, the $230 billion influx into banks during the pandemic has given them wiggle room to handle potential losses, the Fed noted. As of last July, banks had seen a record increase of deposits since the beginning of 2020, up about $4 trillion or 27 percent.
Other market conditions remain strong: The aggregate loan delinquency rate dropped below 1 percent, falling to its lowest level since late 2006. Modified loan balances continued to drop as government pandemic programs ended. Loan growth jumped in the second half of 2021 across all categories following a flat start to the year, according to the Fed. That growth continued in the first quarter of this year, but slowed from late last year.