Banking System Conditions
The banking system remains sound and resilient. Most banks continue to report capital and liquidity levels above applicable regulatory requirements. Deposits have increased overall since the last report.1 Still, some banks face challenges navigating changes in depositor behavior, higher funding costs, and reduced market values for investment securities. Asset quality generally remains sound. However, commercial real estate (CRE) and consumer loan delinquencies have been increasing. Earnings have declined as banks have increased loan loss provisions and incurred higher funding costs. The special assessment by the Federal Deposit Insurance Corporation (FDIC) also contributed to the decline.
Capital Has Increased
Regulatory capital increased in 2023. In aggregate, banks added $76 billion in common equity tier 1 (CET1) capital between year-end 2022 and year-end 2023. Over this period, their CET1 capital ratio increased nearly 50 basis points (figure 1).
Figure 1. Aggregate common equity tier 1 (CET1) capital ratio
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Note: CET1 capital ratio is the ratio of common equity tier 1 capital to risk-weighted assets. See the appendix for further information. Community banks can opt into the community bank leverage ratio framework. Thirty-seven percent of community banks have done so and are excluded from the figure.
Source: Call Report and FR Y-9C.
An alternative capital measure, the tangible common equity (TCE) ratio, also increased. However, it remained below pre-pandemic levels. The TCE ratio is similar to the CET1 capital ratio in that both ratios exclude intangible items such as goodwill; however, the TCE ratio does not account for the riskiness of assets but does include changes in the fair value of available-for-sale securities for all banks.2 Substantial declines in the fair value of securities can weaken a bank's ability to meet unexpected liquidity needs. Some banks continue to report large fair value losses on investment securities resulting from prior interest rate increases.
Liquidity Conditions are Stable
Liquid assets remained above their 10-year average throughout 2023.3 As a share of total assets, liquid asset levels were relatively flat between year-end 2022 and year-end 2023. A decline in the value of securities on bank balance sheets was mostly offset by an increase in cash holdings over this period (figure 2). Security balances declined due to both lower fair values and reduced holdings by banks.
Aggregate deposits were largely stable in the second half of 2023 and steadily increased in the first three months of 2024. In January 2024, deposits at commercial banks rose above $17.5 trillion for the first time since the banking stresses of March 2023 (figure 3).
Figure 2. Liquid assets as a share of total assets
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Note: Liquid assets are cash plus estimates of securities that qualify as high-quality liquid assets as defined by the Basel III liquidity coverage ratio requirement.
Source: FR Y-9C.
Figure 3. Deposits
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Note: Data are for all commercial banks and are seasonally adjusted.
Source: H.8, "Assets and Liabilities of Commercial Banks in the United States."
At the same time, banks increased their reliance on higher cost wholesale funding sources. After falling to historic lows in early 2022, wholesale funding rose to 21.6 percent of total assets at year-end 2023, more in line with pre-pandemic levels (figure 4). As scheduled, the Bank Term Funding Program ceased extending new loans on March 11, 2024,4 and the size of the program has begun to decline.5 ,6
Figure 4. Wholesale funding as a share of total assets
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Note: Wholesale funding is defined as the sum of brokered deposits under $250,000, federal funds purchased, securities sold under agreement to repurchase, subordinated notes and debentures, and other borrowed money.
Source: Call Report and FR Y-9C.
Banks have improved their operational readiness to access the discount window. Since the banking stresses of March 2023, the amount of collateral pre-positioned at the discount window has increased significantly and is now nearly $3 trillion. Over 5,000 banks and credit unions are signed up to use the discount window, of which nearly 3,000 have collateral pledged.7
Loan Growth Has Slowed with Delinquencies Increasing in Some Sectors
Loan growth is still positive but has slowed from a rapid pace the year before. Both weaker loan demand and tighter lending standards contributed to the slowdown.8 Loan growth in most sectors was modest in 2023. A major exception was the credit card sector.9 Credit card balances increased to a historic high at the end of 2023, despite tightened lending standards and fewer credit line increases at large banks.10
Overall asset quality remains generally sound. The total loan delinquency rate was below one percent at year-end 2023, as the delinquency rate for commercial and industrial (C&I) loans was relatively stable and the delinquency rate for residential real estate (RRE) steadily declined in 2023. However, delinquency rates are rising in CRE and some consumer sectors. The delinquency rate for consumer loans rose above one percent for the first time since the first quarter of 2020, and the delinquency rate for CRE loans increased to 0.9 percent, a five-year high (figure 5).
Figure 5. Loan delinquency rates
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Note: Delinquent loans are those 90+ days past due or in nonaccrual status.
Source: Call Report and FR Y-9C.
The rise in CRE delinquencies was largely due to loans secured by nonowner-occupied nonfarm nonresidential properties in banks with at least $100 billion in total assets. Nonowner-occupied nonfarm nonresidential properties include hotels, offices, retail stores, warehouse facilities, and other types of business property used as collateral. At the large banks, office loans showed the greatest delinquency rate increase among property types, particularly in metropolitan areas (figure 6). Reduced demand for office space and higher interest rates adversely affected office loan performance.11 While banks with total assets of less than $100 billion have lower CRE delinquency rates than large banks, they have a greater percentage of their total loans exposed to the CRE sector.
Figure 6. Income-producing CRE loan delinquency rates by property type
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Note: Delinquent loans are those 30+ days past due or in nonaccrual status.
Source: FR Y-14Q.
The delinquency rate for consumer loans was driven higher in 2023 by the credit card and auto loan sectors (figure 7). The credit card loan delinquency rate reached 1.7 percent at year-end 2023, its highest level in the last five years. In addition, the share of borrowers carrying forward all or some portion of their credit card balance to the next billing cycle has increased. The delinquency rate for auto loans increased in 2023 and now exceeds pre-pandemic levels.12 Auto loans originated prior to the pandemic by banks with total assets over $100 billion have performed worse than newer loans, partially reflecting a tightening of lending standards for the newer loans.
Figure 7. Consumer loan delinquency rates
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Note: Delinquent loans are those 90+ days past due or in nonaccrual status.
Source: Call Report and FR Y-9C.
Earnings Have Declined, in Part Due to Nonrecurring Expenses
Return on average assets and return on equity were near their 10-year averages in the first three quarters of 2023. The FDIC special assessment and other nonrecurring expenses in the fourth quarter led to a sharp decline in both earnings metrics (figure 8).13 ,14 Excluding the FDIC special assessment, both earnings metrics would still have declined, but by a smaller amount.
Figure 8. Bank return on average assets (ROAA) and return on equity (ROE)
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Note: ROE is net income divided by average equity capital, and ROAA is net income divided by average assets.
Source: Call Report and FR Y-9C.
Net interest margin measures the difference between interest income and interest expense, relative to interest earning assets. Aggregate net interest margin declined slightly in 2023 as interest expense increased faster than interest income. Interest expense rose quickly in 2023 as banks paid more for deposits and used more wholesale funding.
Aggregate loan loss provisions also increased in 2023 (figure 9). Large banks have increased provisions amid credit quality concerns in the CRE and consumer loan sectors. Higher losses from the sale of investment securities also contributed to the decline in earnings.
Figure 9. Provisions for loan and lease losses as a share of average loans and leases
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Source: Call Report and FR Y-9C.
Market Indicators Have Improved
Market assessments of bank risk, including the market leverage ratio and credit default swap (CDS) spreads, provide a forward-looking assessment of the strength of the banking system. The market leverage ratio measures a bank's financial position based on the ratio of its market capitalization to the sum of market capitalization and the book value of liabilities. A lower stock price reduces the market leverage ratio, indicating lower market confidence in a bank's financial strength. Conversely, higher stock prices produce a higher ratio, reflecting a higher degree of confidence in a bank's financial strength. As a complement to the market leverage ratio, CDS spreads track the price of insurance against a default by a given bank. If a bank's CDS spread increases, it means the market has lower confidence in the bank's creditworthiness. Lower CDS spreads indicate higher market confidence in a bank's creditworthiness.15
The average market leverage ratio and average CDS spread for the largest banks moved in directions consistent with an improvement in investor sentiment since the last report (figure 10).
Figure 10. Average credit default swap (CDS) spread and market leverage ratio (daily)
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Note: The market leverage ratio is the ratio of a firm's market capitalization to the sum of market capitalization and the book value of liabilities. Averages are calculated from available observations for the eight LISCC firms (Bank of America Corporation; The Bank of New York Mellon Corporation; Citigroup Inc.; The Goldman Sachs Group; JPMorgan Chase & Co.; Morgan Stanley; State Street Corporation; and Wells Fargo & Company).
Source: Federal Reserve staff calculations using Bloomberg data.
First Quarter 2024 Earnings at Large Firms
This section provides a recap of first quarter 2024 earnings results for 23 large banking firms ("large banks").16 While such metrics are indicative, it should be noted that the sample may not necessarily be representative of the entire banking sector.
In the first quarter of 2024, large banks reported healthy financial performance. Aggregate large bank profitability, as measured by return on equity, was 12 percent, compared to 5 percent in the fourth quarter of 2023 and 13 percent in the first quarter of 2023. In the first quarter of 2024, large banks reported higher quarter-over-quarter earnings due to higher capital market and investment management fee revenues, lower nonrecurring costs, and smaller credit loss provisions, which were partially offset by lower net interest income.
At most large banks, both the nonperforming loan rate and loan loss rate increased quarter-over-quarter. Credit loss allowances as a percentage of loans remained relatively stable with fourth quarter 2023 levels. Large banks continued to indicate that credit loss allowances will be sufficient to cover potential future loan losses, including loans in the office commercial real estate and credit card categories.
The aggregate CET1 capital ratio for large banks approximated 12 percent on March 31, 2024, in line with the level on December 31, 2023.
References
1. See Board of Governors of the Federal Reserve System, Supervision and Regulation Report (Washington: Board of Governors, November 2023), https://www.federalreserve.gov/publications/2023-november-supervision-and-regulation-report.htm. Return to text
2. Accounting standards do not require banks to reflect declines in the fair value of held-to-maturity securities within equity capital. However, for held-to-maturity securities that were transferred from the available-for-sale category, declines in fair value that existed at the date of the transfer are reported within equity capital. Return to text
3. The 10-year average for liquid assets as a share of total assets was 21.6 percent at year-end 2023. See section 4 of the May 2024 Financial Stability Report for additional discussion of liquidity conditions in the banking system. Board of Governors of the Federal Reserve System, Financial Stability Report (Washington: Board of Governors, May 2024), https://www.federalreserve.gov/publications/files/financial-stability-report-20240419.pdf. Return to text
4. See Board of Governors of the Federal Reserve System, "Federal Reserve Board announces the Bank Term Funding Program (BTFP) will cease making new loans as scheduled on March 11," (Washington: Board of Governors, January 2024), https://www.federalreserve.gov/newsevents/pressreleases/monetary20240124a.htm. Return to text
5. See box 4.1 of the May 2024 Financial Stability Report for discussion of the Bank Term Funding Program, https://www.federalreserve.gov/publications/files/financial-stability-report-20240419.pdf. Return to text
6. "Federal Reserve Balance Sheet: Factors Affecting Reserve Balances – H.4.1," Board of Governors of the Federal Reserve System, last modified May 2, 2024, https://www.federalreserve.gov/releases/h41/. Return to text
7. "Discount Window Readiness," Board of Governors of the Federal Reserve System, April 12, 2024, https://www.federalreserve.gov/monetarypolicy/discount-window-readiness.htm. Return to text
8. Board of Governors of the Federal Reserve System, "The January 2024 Senior Loan Officer Opinion Survey on Bank Lending Practices" (Washington: Board of Governors, 2024), https://www.federalreserve.gov/data/sloos/sloos-202401.htm. See also Board, "The October 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices," SLOOS, https://www.federalreserve.gov/data/sloos/sloos-202310.htm; "The July 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices," SLOOS, https://www.federalreserve.gov/data/sloos/sloos-202307.htm; and "The April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices," SLOOS, https://www.federalreserve.gov/data/sloos/sloos-202304.htm. Return to text
9. Board of Governors of the Federal Reserve System, H.8, "Assets and Liabilities of Commercial Banks in the United States," https://www.federalreserve.gov/releases/h8/current/default.htm. Return to text
10. Federal Reserve Bank of Philadelphia, "Insights: Large Bank Credit Card and Mortgage Data, FR Y-14M data through Q3 2023," https://www.philadelphiafed.org/-/media/frbp/assets/surveys-and-data/y14/2023/q3/23q3-y-14-narrative.pdf?la=en&hash=BE1DC368D286470873D1CE42BEE67968. Return to text
11. See section 1 of the May 2024 Financial Stability Report for additional discussion commercial real estate prices, https://www.federalreserve.gov/publications/files/financial-stability-report-20240419.pdf. Return to text
12. See section 2 of the May 2024 Financial Stability Report for additional discussion on auto loan delinquencies, https://www.federalreserve.gov/publications/files/financial-stability-report-20240419.pdf. Return to text
13. See FDIC, "Special Assessment Pursuant to Systemic Risk Determination," (Washington, December 2023), https://www.fdic.gov/deposit/insurance/assessments/specialassessment-psrd.html. Return to text
14. Other nonrecurring expenses included goodwill impairments, Bloomberg Short-term Bank Yield Index cessation charges, Foreign Exchange devaluations, and severance costs. Return to text
15. See the appendix for additional information on the market indicators. Return to text
16. The sample includes Ally Financial Inc.; American Express Company; Bank of America Corporation; The Bank of New York Mellon Corporation; Capital One Financial Corporation; The Charles Schwab Corporation; Citigroup Inc.; Citizens Financial Group, Inc.; Discover Financial Services; Fifth Third Bancorp; The Goldman Sachs Group, Inc.; Huntington Bancshares Incorporated; JPMorgan Chase & Co.; KeyCorp; M&T Bank Corporation; Morgan Stanley; Northern Trust Corporation; The PNC Financial Services Group, Inc.; Regions Financial Corporation; State Street Corporation; Truist Financial Corporation; U.S. Bancorp; and Wells Fargo & Company. Data is unadjusted for mergers and acquisitions. Return to text