Page 29 - Winter 2025 - 2.pub

Strong Earnings, Asset Quality Put

U.S. Banks on Solid Ground

BY CARL WHITE

quarters; the auto loan
Overall, U.S. banks are in good condition with
delinquency rate was just below
solid earnings, sound asset quality and regulatory capital its five-year high in the second
levels above required minimums. This assessment comes quarter.
from the Federal Reserve Board of Governors in its
semiannual Supervision and Regulation Report (PDF) The nonperforming ratio for CRE
published last month. The report covers banking system loans is at its highest level since
conditions in the first half of 2024, as well as regulatory 2014, primarily driven by loans for office
and supervisory developments for the institutions under buildings in major cities. At large banks, the
the Fed’s supervisory umbrella. nonperforming loan rate for office loans hit 11% in the
second quarter. And while the rate didn’t increase as
Supervision by the Numbers much at small banks, they tend to hold a larger
percentage of their loan portfolios in CRE loans, elevating
Although the Fed has supervisory authority over several the stakes for CRE market weakness. Office vacancy rates
large banks and all the nation’s bank holding companies, climbed during the COVID-19 pandemic and, in many
most banks under its supervisory umbrella are community cases, have remained elevated as many people continue
banks—banks with assets of less than $10 billion. Of the to work from home.
705 state member banks (SMBs) the Fed supervised at
midyear 2024, 92% (650 banks) met that community bank Supervisors are closely monitoring underwriting
threshold and were part of the Fed’s Community Banking standards, loan quality and credit loss reserve levels
Organization (CBO) portfolio. The next largest group— across the entirety of banks’ loan portfolios.
consisting of 42 SMBs—makes up the Regional Banking
Organization (RBO) portfolio; banks in this group have Other Supervision Priorities
total assets of $10 billion to $100 billion.
Assessing banks’ preparedness for managing liquidity risk
At the St. Louis Fed, all our supervised banks fall into the remains high on the Fed’s priority list. Banks are expected
CBO or RBO portfolio. Currently, we have direct to have prudent liquidity risk-management practices and
supervisory responsibility for 129 SMBs in the two to regularly test their ability to access multiple sources of
portfolios, representing nearly one-fifth of the Fed contingent funding, such as Federal Home Loan Bank
System’s supervised banks. Eight banks are in our RBO advances and the Federal Reserve’s discount window.
group and the remaining 122 are in the CBO group. In
terms of assets under supervision, the RBO banks have a Cybersecurity is another supervisory priority. Examiners
are specifically looking for adequate risk management,
combined $256.1 billion, or about 70% of the total. The governance and controls to protect banks’ data and
combined assets of the CBO banks total $108.2 billion.
operations against cyber threats. That assessment
An Eye on Credit extends to certain services performed on behalf of banks
by their external service providers.
While banking fundamentals are currently strong, This article is part of a series titled “Supervising Our
supervisors are keeping an eye on credit quality. The level Nation’s Financial Institutions.”
of nonperforming loans remains low, and the ratio of ___________________________
nonperforming loans to total loans is below the 1% Carl White (Carl.White@stls.frb.org) is Senior Vice
benchmark. However, delinquency rates for certain President in charge of banking supervision at the Federal
categories of consumer and commercial real estate
Reserve Bank, St. Louis.
(CRE) loans have risen. In the consumer loan segment,
supervisors are watching credit card and auto loan
delinquencies, both of which have ticked up in recent

Arkansas Community Banker | 29 | Winter 2025