In a 2021 Risk Review, the FDIC underscored intensified credit and market risks arising from the COVID-19 pandemic.
With regard to credit risk, the FDIC highlighted, among other things, that:
- FDIC-insured institutions held a record volume of commercial real estate loans by the end of 2020; the agency said that the outlook for these loans is uncertain as a result of the heightened prevalence of remote work;
- the outlook of the quality of consumer assets is unclear as consumer loan volumes have decreased;
- the increase in the banking sector's exposure to nonbank financial institutions, particularly with respect to mortgage lending, has heightened the industry's vulnerability to risks associated with nonbanks' lending activities; and
- although small business closures and bankruptcies did not necessarily result in credit deterioration in 2020, the long-term impact of the pandemic on small business asset quality is unclear and continues to be a significant source of credit risk for banks.
With regard to market risk, the FDIC noted that (i) banks are challenged by the low interest rate environment and (ii) economic uncertainty and an abrupt rise in deposits have resulted in community banks allocating a larger percentage of their assets to sources with greater liquidity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.