The Federal Deposit Insurance Corporation (FDIC) has released its 2024 Risk Review, a comprehensive analysis of the current state of the U.S. banking industry. The report identifies key risks and emerging trends that could impact banks’ safety and soundness in the coming year.
MBK Search has looked through this year’s report and highlighted five key points.
1: Economic Growth Surpasses Expectations Despite Higher Interest Rates
The U.S. economy expanded in all four quarters of 2023, defying analysts’ expectations for slower growth or recession. Consumer spending was the primary driver of economic development, followed by government spending. Labor market growth slowed but remained historically tight, supporting consumer incomes.
2: Banking Industry Demonstrates Resilience After Spring Stress
The banking industry’s earnings remained high in 2023 as higher net interest income offset increased provision expenses. Despite challenges, overall asset quality metrics were favorable, and liquidity stabilized. Capital levels increased, and problem banks remained near the low end of the typical range for non-crisis periods.
3: Market Risks Pose Challenges for Banks
Higher interest rates, an inverted yield curve, declining deposits, higher funding costs, and compressing net interest margins for some banks presented challenges in 2023. Many banks reduced securities holdings, pledged securities to ensure access to liquidity lines, and turned to higher-cost borrowings to cover anticipated liquidity needs.
4: Credit Risks Vary by Loan Type
Greater asset quality deterioration occurred in commercial real estate and consumer loans. Office property loans in large bank portfolios showed emerging weakness. Residential real estate credit quality remained sound, but early signs of stress emerged, particularly at community banks. Consumer loan performance weakened, led by credit card and auto loans.
5: Climate-Related Financial Risks Intensify
In 2023, the number of billion-dollar climate events was the highest since 1980. Insurance policies covering losses associated with severe climate and weather events are becoming more expensive or unavailable, increasing risks to the banking industry.
