The Federal Reserve’s semiannual supervision and regulation
report provides the banking industry vital insight based on the agency’s latest
assessment data about conditions facing the banking system, as well as its current
regulatory and supervisory priorities.
“The Federal Reserve is focused on improving the speed,
force, and agility of supervision, as appropriate,” the Fed wrote in the
report. “This includes ensuring supervisory actions are commensurate with a
banking organization’s size, risk, and complexity. The Federal Reserve
continues to closely monitor risks to the banking sector, including credit,
interest rate, and liquidity risks.”
Banking system conditions
In its
overview of the financial condition of the banking sector, the Fed wrote the
banking system “remains sound and resilient,” with most banks continuing to
report adequate capital and liquidity levels to satisfy regulatory
requirements. Aggregate commercial bank deposit levels stabilized in the second
half of 2023 and slightly increased earlier in the year, and asset quality
remains sound overall.
Delinquency rates for some commercial real estate (CRE) loans
and certain consumer loans rising to pre-pandemic levels has caused some
concern among Fed supervisors, the report noted, causing banks to boost their
credit loss allowances in anticipation of further deterioration in asset
quality.
Regulatory developments
The report mentioned recent regulatory policy work,
including actions aimed at promoting stability within the financial system and
minimizing systemic risks.
The Fed noted it recently issued a request for comment soliciting
suggestions from interested stakeholders on how to reduce regulatory burdens,
as well as a third-party risk-management guide for community banks.
“The guide is a supplementary resource consistent with other
similar tools that have been provided to community banks focused on managing
various aspects of these relationships,” the report stated. “The guide provides
potential considerations, resources, and examples through each stage of the
third-party risk-management life cycle. The guide also references potential
considerations and resources for related governance practices.”
Supervisory developments
The Fed intensified its supervisory efforts in 2023 with
respect to assessing banks on the adequacy of their liquidity and interest rate
risk management policies and practices. The agency continuously monitored a
small number of firms with risk profiles identified as being vulnerable to
funding pressures. Given increased delinquencies in certain loan sectors, the
Fed said it continues to view credit risk as a supervisory priority.
Supervisors are closely monitoring underwriting standards and loan quality.
For state member banks focused on the CRE market,
supervisors are conducting in-depth examinations to ensure concentrated banks
are exercising strong risk-management practices. Among the top risks on their
radar are cybersecurity risks. Supervisors are seeking to ensure banks have
adequate controls and resilience to protect their data and operations against
cybersecurity threats, the report stated.
The full report is available on the Fed’s website here.