FDIC Issues Annual Report on Bank Risk

In an annual review, the FDIC summarized its "assessment of risks related to conditions in the U.S. economy, financial markets, and the banking industry." The FDIC considered credit risk, market risk, operational risk and climate-related financial risk.

The FDIC stated that credit conditions "improved in 2021, helped by various government support programs for businesses and consumers, improving economic conditions, and supportive financial market conditions." The FDIC cautioned that inflation, driven in part by global supply chain disruption, remains a prominent credit risk. The FDIC noted that while events such as the Russian invasion of Ukraine posed additional risk, the Treasury yield curve shifts reflected economic improvement. The FDIC also determined that the financial markets have gradually shifted their focus from pandemic recovery to combating inflation.

With regard to market risk, the FDIC determined that low interest rates posed challenges to banking sector profitability, particularly with respect to banks' net interest margins. The FDIC asserted that despite banks' net interest margins falling to a record low in the past year, a shift in investment focus towards long-term maturity assets, combined with record high levels of deposits held by community banks, helped ease the burden of the decline in margin. The FDIC noted that although higher interest rates could benefit banks' interest income in the short term, such rates could pose greater risks to long-term investments.

The FDIC highlighted risks pertaining to cybersecurity threats and illicit activity. The agency said that the number of ransomware attacks on banks rose in the past year, and that banks continue to be vulnerable to hacking groups.

The FDIC also highlighted several risks posed by climate change, including (i) physical risks from harm to people and property and (ii) transition risks relating to compliance with new policy, technology and regulation focused on reducing carbon reliance. The FDIC warned that severe climate-related events can have significant impacts on the banking industry and disrupt local economic conditions.