Banking System Conditions
The banking system remains sound-202411 and resilient. Asset quality remains sound overall and earnings are solid. Pockets of elevated risk pose challenges for some banks. Credit performance in CRE lending and some consumer lending sectors remains an area of concern.
Capital Levels Continue to Rise
Regulatory capital increased in the first half of 2024, and most banks continued to report capital levels well above applicable regulatory requirements. As of the second quarter, over 99 percent of banks were well capitalized (figure 1). Further, 2024 stress test results showed that while large banks would endure greater losses than last year's test, they are well positioned to weather the severe recession they were tested against and stay above minimum capital requirements.1 Banks with less than $100 billion in total assets also continued to report strong regulatory capital levels.
Figure 1. Share of well-capitalized banks
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Note: Banks that met the capital ratio requirements for the "well capitalized" designation according to the Prompt Corrective Action guidelines. See the appendix for further information.
Source: Call Report and FR Y-9C.
Tangible common equity (TCE), an alternate measure of bank capital, also increased in the first half of 2024.2 As of the second quarter, banks reported $2.0 trillion in aggregate TCE, compared with $1.8 trillion a year earlier. The increase in TCE was partially attributed to an improvement in the fair value of available-for-sale securities. Banks reported $203 billion in fair value losses on available-for-sale securities as of the second quarter of 2024, down from $248 billion a year earlier. Banks also reported $308 billion in fair value losses on held-to-maturity securities as of the second quarter of 2024, compared with $310 billion a year earlier (figure 2).3
Figure 2. Net fair value gains (losses) on investment securities
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Note: Net fair value gains (losses) are computed as fair value less amortized cost.
Source: Call Report and FR Y-9C.
Liquidity and Funding Conditions Remain Stable
Funding risk for banks was generally unchanged in the first half of 2024. Aggregate deposit and liquid asset levels remained relatively stable over this period. Liquid assets' share of total assets declined slightly in the first half of this year (figure 3). Deposits at commercial banks have grown slightly since the end of 2023.4
Figure 3. 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.
Uninsured deposits' share of total assets continued to decline in the first half of 2024 and fell to levels last seen in 2019 (figure 4). Lower levels of uninsured deposits helped reduce funding vulnerabilities for banks. Still, some banks continued to face challenges managing their funding needs, particularly those with high levels of uninsured deposits and significant fair value losses.
Figure 4. Uninsured deposits as a share of total assets
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Note: Uninsured deposits are as reported or calculated using schedule RC-O Memoranda items of the Call Report.
Source: Call Report.
Larger banks increased their use of wholesale funding sources during the first half of 2024. By contrast, smaller banks reduced their reliance on wholesale funding during the same period (figure 5).
Figure 5. 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.
CRE and Consumer Loan Delinquencies Continue to Show Signs of Weakness
Loan delinquency rates generally remained low. The total loan delinquency rate remained below 1 percent in the first half of 2024. However, delinquency rates for CRE loans and consumer loans are elevated (figure 6).
Figure 6. 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 delinquency rate for CRE loans has increased to its highest level since 2014. Looking closer at the CRE sector, loans secured by offices, especially those in major cities, remained the top concern. At the large banks, the delinquency rate for office loans increased to 11.0 percent in the second quarter of 2024 (figure 7). The deterioration in CRE loans has so far been mostly concentrated at large banks. However, the delinquency rate for CRE loans held by smaller banks also increased during the first half of 2024. Smaller banks generally hold a higher share of their assets in CRE loans compared to large banks.
Figure 7. 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.
Also within the CRE sector, the multifamily segment has come under some stress. Revenue growth has slowed, operating costs have risen, and valuations have declined for certain multifamily properties. As a result, the delinquency rate for multifamily loans held by large banks has increased steadily, from a low level.
The delinquency rate for consumer loans remained elevated in the first half of 2024 despite a decline in the second quarter. The second quarter improvement was mostly due to a decline in credit card delinquencies. Still, the credit card loan delinquency rate was notably higher than a year earlier. The delinquency rate for auto loans also increased from a year earlier and was just below its five-year high as of the second quarter of 2024 (figure 8).
Figure 8. 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.
Banks have continued to provision against potential credit losses amid elevated delinquencies in CRE and consumer lending.
Earnings Have Rebounded despite Modest Loan Growth
Loan growth was modest in the first half of 2024. Loan balances at commercial banks grew at a slower pace in the first half of this year compared to the same period in 2023.5 Both weaker loan demand and tighter lending standards contributed to the lending slowdown.6
Return on average assets and return on equity improved in the first half of 2024 (figure 9). Both metrics rebounded from their fourth quarter 2023 declines, which were in part due to certain large nonrecurring expenses, including the Federal Deposit Insurance Corporation (FDIC) special assessment.7
Figure 9. Bank return on average assets and return on equity
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Note: Return on equity is net income divided by average equity capital, and return on average assets is net income divided by average assets.
Source: Call Report and FR Y-9C.
After declining slightly in the first quarter of 2024, aggregate net interest margin was flat in the second quarter (figure 10).8 This reflected smaller increases in the cost of deposits, even as noninterest-bearing deposits continued to convert to interest-bearing deposits. Over the first half of this year, net interest margin for smaller banks remained relatively flat, while net interest margin for large banks fell slightly. Smaller banks generally rely more on net interest income to generate their revenue, as compared to the large banks with their more diversified revenue sources.
Figure 10. Aggregate net interest margin
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Note: Net interest margin is net interest income divided by average earning assets.
Source: Call Report and FR Y-9C.
Higher noninterest income in the first half of 2024 also contributed to the earnings improvement.
Market Indicators Have Moved Consistent with Improved Investor Sentiment
Market assessments of bank risk, including the market leverage ratio and credit default swap (CDS) spreads, provide a forward-looking assessment of a bank's financial strength. 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, while a higher price increases the ratio. The greater the market leverage ratio, the higher the degree of market 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. Conversely, lower CDS spreads indicate higher market confidence in a bank's creditworthiness.9
The average market leverage ratio and the average CDS spread for the largest banks generally improved during 2024. As of early October, both metrics have improved from their 2023 levels (figure 11).
Figure 11. Average market leverage ratio and average credit default swap (CDS) spread (daily)
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Note: The average market leverage ratio and the average CDS spread are calculated as simple averages 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, Inc.; JPMorgan Chase & Co.; Morgan Stanley; State Street Corporation; and Wells Fargo & Company). See the appendix for further information on the market leverage ratio and CDS spreads.
Source: Federal Reserve staff calculations using Bloomberg data.
Third Quarter 2024 Financial Results at Large Firms
This section provides a recap of banking conditions at large banking firms ("large banks") for the third quarter of 2024, based on financial results reported by a sample of 23 large banks.10
In the third quarter of 2024, aggregate return on equity for large banks was 12 percent, compared to 13 percent in the second quarter of 2024. The quarter-over-quarter decline in large banks' return on equity was due to seasonal declines in capital market revenues and lower nonrecurring gains, which were partially offset by growth in other sources of noninterest income and higher net interest income. A majority of large banks reported slightly higher provisions and operating expenses compared to the second quarter of 2024.
Large banks generally reported that deposit costs continued to increase but at the slowest pace since the first quarter of 2022. Several large banks highlighted that the shift from noninterest-bearing deposits to interest-bearing deposits appears to be reaching its peak. Most large banks also reported that deposit balances increased during the third quarter of 2024.
Loan growth was modest in the third quarter of 2024, and credit loss reserves' share of total loans remained relatively stable. In the third quarter of 2024, nonperforming loans' share of total loans at large banks was generally stable and loan loss rates declined quarter-over-quarter at a majority of large banks for the first time in three years.
The aggregate common equity tier 1 (CET1) capital ratio for large banks at the end of the third quarter of 2024 remained in line with its level at the end of the second quarter of 2024 at approximately 13 percent.
References
1. See Board of Governors of the Federal Reserve System, "Federal Reserve Board annual bank stress test showed that while large banks would endure greater losses than last year's test, they are well positioned to weather a severe recession and stay above minimum capital requirements," news release, June 26, 2024, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20240626a.htm. Return to text
2. Although TCE is similar to common equity tier 1 (CET1) capital in that both measures exclude intangible items such as goodwill, TCE includes changes in the fair value of available-for-sale securities for all banks. In contrast, only the largest banks are required to include changes in the fair value of available-for-sale securities in CET1 capital. Return to text
3. 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
4. Table 1. Selected Assets and Liabilities of Commercial Banks in the United States; data shown as percent change at break adjusted, seasonally adjusted, annual rate. Board of Governors of the Federal Reserve System, H.8, "Assets and Liabilities of Commercial Banks in the United States," September 20, 2024, https://www.federalreserve.gov/releases/h8/20240920/. Return to text
5. See Table 1, Selected Assets and Liabilities of Commercial Banks in the United States; data shown as percent change at break adjusted, seasonally adjusted, annual rate. Board of Governors of the Federal Reserve System, H.8, "Assets and Liabilities of Commercial Banks in the United States," September 20, 2024, https://www.federalreserve.gov/releases/h8/20240920/. Return to text
6. Board of Governors of the Federal Reserve System, "The April 2024 Senior Loan Officer Opinion Survey on Bank Lending Practices" (Washington: Board of Governors, 2024), https://www.federalreserve.gov/data/sloos/sloos-202404.htm; and "The July 2024 Senior Loan Officer Opinion Survey on Bank Lending Practices" (Washington: Board of Governors, 2024), https://www.federalreserve.gov/data/sloos/sloos-202407.htm. Return to text
7. See Federal Deposit Insurance Corporation, "Special Assessment Pursuant to Systemic Risk Determination," (Washington: FDIC, December 2023), https://www.fdic.gov/deposit/insurance/assessments/specialassessment-psrd.html. Other nonrecurring expenses included goodwill impairments, Bloomberg Short-term Bank Yield Index cessation charges, foreign exchange devaluations, and severance costs. Return to text
8. Net interest margin measures the difference between interest income and interest expense, relative to interest-earning assets. Return to text
9. See the appendix for additional information on the market indicators. Return to text
10. 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 are unadjusted for mergers and acquisitions. Return to text