From the federal financial institution regulators
FDIC issues quarterly banking profile for first quarter 2023
The Federal Deposit Insurance Corp. (FDIC) released on May 31, 2023, the quarterly banking profile covering the first quarter of 2023. While the profile is the first report released since the failures of Silicon Valley Bank (SVB) and Signature Bank in March 2023, FDIC Chair Martin Gruenberg cautioned that the full effects of the industry’s response to the stress of recent failures might not become fully apparent until second quarter results are available later this summer. According to the report, FDIC-insured banks and savings institutions earned $79.8 billion in the first quarter of 2023, an increase of $11.5 billion or 16.9% from the fourth quarter of 2022. But, after excluding the income effects of the banks that acquired SVB and Signature, quarter-over-quarter net income was roughly flat, the FDIC said.
The report provides these additional first quarter statistics:
- Net interest income totaled $175.7 billion for the first quarter of 2023, down from $179.9 billion (2.3%) in the fourth quarter of 2022. From the previous quarter, the average net interest margin decreased 7 basis points to 3.31%.
- The aggregate return on average assets ratio was 1.36%, up from 1.16% in the fourth quarter of 2022.
- Total loans and leases declined $14.6 billion (0.1%) from the previous quarter, largely driven by loans transferred to the FDIC as receiver, combined with a seasonal decline in credit card loan balances.
- Total deposits were $18.7 trillion in the first quarter of 2023, a decline of $472.1 billion (2.5%) from the fourth quarter of 2022. The decline was driven by a reduction in uninsured deposits, which dropped 8.3%, while insured deposits increased by 2.5%.
- From the previous quarter, the noncurrent loan rate increased 2 basis points to 0.75%.
- Community banks’ quarterly net income totaled $7 billion for 2022, a decrease of $306 million or 4.2% from last quarter.
- Unrealized losses on available-for-sale and held-to-maturity securities remained elevated at $515.5 billion, although recent declines in medium- and long-term rates have reduced the volume of these unrealized losses from $617.8 billion in the previous quarter.
- The deposit insurance fund balance was $116.1 billion on March 31, down $12.1 billion from the end of the fourth quarter.
The total number of FDIC-insured commercial banks and savings institutions declined from 4,706 in the fourth quarter 2022 to 4,672 in the first quarter of 2023. During the first quarter, one new bank opened, one bank self-liquidated, two banks failed, and 31 institutions were absorbed by mergers. The number of institutions on the FDIC’s problem bank list increased by four to 43. Total assets of problem banks increased $10.5 billion from the previous quarter to $58 billion.
NCUA issues first quarter 2023 performance data
The National Credit Union Administration (NCUA) reported on June 8, 2023, quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the first quarter of 2023. Highlights include:
- The number of federally insured credit unions declined to 4,712 in the first quarter of 2023 from 4,760 in the fourth quarter of 2022. In the first quarter of 2023, 2,950 federal credit unions and 1,762 federally insured, state-chartered credit unions existed.
- Total assets reported for federally insured credit unions rose by 4.4% to $2.21 trillion, up $93 billion from a year ago.
- Net income totaled $17.7 billion in the first quarter of 2023 at an annual rate, down $0.6 billion (3%) compared with the same quarter a year earlier.
- The annualized return on average assets was 81 basis points in the first quarter of 2023, down from 87 basis points in the first quarter of 2022.
- The credit union system’s net worth increased by $15.5 billion, or 7.2%, over the year to $231.9 billion. The aggregate net worth ratio was 10.49% in the first quarter of 2023, up from 10.21% a year earlier.
OCC issues semiannual risk report
The Office of the Comptroller of the Currency (OCC) on June 14, 2023, issued its semiannual risk perspective for spring 2023. The report highlights risks facing the banking system and reflects OCC supervisory priorities for national banks and federal thrifts. In a statement, acting Comptroller Michael Hsu encouraged banks to be:
- “Guarding against a false sense of comfort from the recent relative stability in bank markets and from the benign credit performance over the course of the pandemic,
- “Reevaluating exposures, especially asset and liability concentrations, across a range of scenarios,
- “Taking actions to preserve capital and maintain strong liquidity consistent with each bank’s risk profile,
- “Maintaining discipline and strong risk management across all risk areas, not just in response to headlines, and
- “Preparing to communicate clearly, credibly, and promptly about their condition and risk profile should questions arise from customers, investors, depositors, and other stakeholders.”
The OCC has been closely monitoring several areas in the institutions they supervise, focusing on liquidity, operational, credit, and compliance risks. According to the report, liquidity positions have largely been strengthened in response to the turmoil in the first quarter of 2023 including the failure of several banks and investment portfolio depreciation, but risks from elevated interest rates continue. Credit risk remains moderate in aggregate, but signs of stress are increasing, especially in consumer credit and certain segments of commercial real estate. Operational risk is elevated as cyberthreats persist and the digitalization of banking products and services expands, especially as banks increase the use of third parties. Compliance risk is also highlighted, as banks operate in a dynamic environment in which compliance management systems are challenged to keep pace with changing products, services, and delivery channels.
The report also reminds banks that they should implement robust risk management programs to identify, measure, monitor, and control climate-related financial risks. An update on supervisory interagency efforts focuses on institutions with more than $100 billion in assets as the OCC continues to review comments received on draft “Principles for Climate-Related Financial Risk Management for Large Banks” that have been issued by the federal banking regulators. In the report, the OCC provides observations from its reviews of climate risk management practices at larger institutions.
Fed issues supervision and regulation report
On May 15, 2023, the Federal Reserve (Fed) issued its semiannual supervision and regulation report. The report notes that the U.S. banking system remains sound and resilient with strong capital and liquidity, but it calls for vigilance in assessing and responding to risks. The report further highlights the recent large bank failures that have demonstrated the risks of concentrated funding sources and poor management of interest-rate risk.
As economic uncertainties and rising interest rates persist, the Fed notes that banks are facing heightened credit, liquidity, and interest-rate risks. Significant declines in the fair value of securities, combined with high levels of uninsured deposits, can elevate liquidity risks. The report reminds banks they have access to additional liquidity through the Fed’s Bank Term Funding Program, which was established in the aftermath of the SVB and Signature Bank failures.
While loan delinquency rates remain low, the Fed indicates in the report that it anticipates delinquencies to increase as interest rates continue to remain elevated. The report also notes that potential deterioration in the office segment stemming from remote work arrangements will prompt close monitoring of commercial real estate loan performance.
Fed issues financial stability report
In its latest financial stability report released on May 8, 2023, the Fed reports that while higher interest rates contributed to the recent bank failures, high levels of capital and moderate risk exposures are an indication that a large majority of U.S. banks are resilient to potential strains from higher rates.
The biannual report also recognizes that while some banks experienced significant funding strains following the SVB and Signature Bank failures in March, policy interventions by the Fed and other agencies helped mitigate these strains and limit potential further stress. With the increasing interest rates, deposit outflows picked up as higher-paying deposit alternatives became more attractive to businesses and households, according to the report.
Deposits declined in the fourth quarter of 2022 at a 7% annual rate, and outflows increased slightly in January and February before the banking sector stress in March. As a result, some banks increased their reliance on wholesale funding sources, although banks’ overall reliance on short-term wholesale funding remained near historically low levels. The report also highlights banks’ overall vulnerability to credit losses, particularly for banks with sizable commercial real estate exposures.
Federal banking agencies issue third-party risk guidance
The Fed, OCC, and FDIC on June 6, 2023, issued long-awaited final interagency guidance for financial institutions managing risks associated with third-party relationships. The guidance offers sound risk management principles for banks to follow when developing and implementing risk management practices through all stages in those relationships, including planning, due diligence and selection, contract negotiation, and termination. The guidance applies to institutions of all asset sizes and reminds banks to take into account their own level of risk, complexity, and size as well as the nature of the third-party relationship. The statement also includes guidance for conducting independent reviews and maintaining documentation.
The guidance stresses that the banking agencies will review a bank’s risk management of third-party relationships as part of their standard supervisory processes. Among other things, supervisors typically assess the ability of a bank’s management to oversee and manage its third-party relationships, evaluate the effects of those relationships on the bank’s risk profile, and perform transaction testing to evaluate the activities performed by the third party while assessing compliance with applicable laws and regulations.
The agencies plan to develop additional resources to assist community banks in managing third-party risks. The final guidance replaces each agency’s existing guidance on third-party risk management and is effective immediately.
Agencies and administration launch initiatives to combat racial bias in appraisal process
Six federal regulatory agencies on June 1, 2023, requested public comment on a proposed rule to regulate the credibility of algorithmic models used in real estate valuations. This proposal came on the same day that the White House issued a fact sheet on the agencies’ broader effort to address potential racial biases in home valuations, which included the creation of the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) in 2022. The proposed rule issued jointly by the Fed, OCC, FDIC, Consumer Financial Protection Bureau (CFPB), Federal Housing Finance Agency (FHFA), and NCUA would require institutions that engage in covered transactions to adopt policies, practices, procedures, and control systems to ensure that automated valuation models (AVMs) adhere to quality control standards designed to ensure the credibility and integrity of valuations.
The proposed rule recognizes that while advances in AVM technology and data availability have the potential to contribute to lower costs and reduce loan cycle times, institutions using AVMs need to take appropriate steps regarding valuation credibility and integrity. The proposed rule also states that it is important that the AVMs being used adhere to quality control standards designed to comply with applicable nondiscrimination laws.
In addition to the AVM rule, the Federal Financial Institutions Examination Council agencies (which do not include the FHFA) issued a related proposed rule addressing reconsiderations of value (ROV) for residential real estate transactions. The proposed ROV rule would advise on policies that financial institutions may implement to allow consumers to provide additional information that might not have been considered during an appraisal or if deficiencies are identified in the original appraisal. ROVs are requests from a financial institution to an appraiser or other preparer of a valuation report to reassess the value of residential real estate. An ROV may be warranted if a consumer provides information to a financial institution about potential deficiencies or other information that might affect the estimated value.
Comments on the proposed ROV rule are due Aug. 21, 2023. Comments on the AVM rule are due 60 days after publication in the Federal Register.
CFPB issues advisory on storing money on apps lacking deposit insurance
The CFPB on June 1, 2023, issued a consumer advisory warning that many widely used nonbank payment apps might not be held in an account at an FDIC member bank or NCUA member credit union and therefore might not be covered by federal deposit insurance. The CFPB acknowledged the benefits and convenience provided by payment apps but cautioned consumers that they are at risk of losing money stored in those apps in the event a nonbank payment company holding the funds goes out of business or fails.
The CFPB advisory reminds consumers that funds held in products with insured depository institutions are protected up to deposit insurance limits, generally $250,000 under the same owner. The advisory also highlights pass-through arrangements that some payment apps develop with insured banks or credit unions in order to offer coverage for funds held in the apps.
CFPB issues guidance for enforcing Section 1071 rule
The CFPB issued guidance on May 31, 2023, for how the agency plans to enforce its final rule implementing Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which requires the collection and reporting of credit application data for small businesses, including women-owned and minority-owned small businesses.
In a statement, the CFPB said it intends to pay particular attention to covered lenders’ response rates for data requested from applicants. The agency also will consider how a lender’s response rates compare to other financial institutions of a similar size, type, geographic reach, or other relevant factors.
In addition, the CFPB will consider irregularities in a particular response such as high rates of an applicant response indicating “I do not wish to provide this information,” as the CFPB said that such irregularities might indicate steering, improper interference, or other potential discouragement or obstruction of applicants’ preferred responses.
CFPB publishes Section 1071 compliance guide
The CFPB has also released a compliance guide for its small-business lending rule, which implements Section 1071 of Dodd-Frank. The guide includes sample forms and resources for filers. The Section 1071 final rule includes compliance date tiers for initial data collection and reporting dates, with the earliest institutions beginning data collection in October 2024.
