Loans, deposits soared in March, but banks' health is weakening: Fed

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WASHINGTON — The Federal Reserve found that bank deposits and loans grew significantly in March as borrowers sought liquidity infusions and investors shifted to safer assets as the coronavirus pandemic rocked markets and ushered in a probable recession.

But profits and capital levels declined during the first quarter of 2020, and banks' overall health began worsen in the second half of February, the Fed said in its periodically issued supervision and regulation report published Friday.

The Fed also committed to conducting this years’ round of stress tests as planned, despite widespread agreement that the results of those tests will likely be outdated, since the tests are run based on bank exposure data as of the end of 2019 before the onset of the pandemic.

The Fed said Friday that earnings of large U.S. banks decreased by more than 50% during the first quarter of 2020 compared to the first quarter of 2019, largely due to higher provisions for loan losses.
The Fed said Friday that earnings of large U.S. banks decreased by more than 50% during the first quarter of 2020 compared to the first quarter of 2019, largely due to higher provisions for loan losses.

But the Fed added in the report that in addition to the stress tests, it would “also conduct a series of sensitivity analyses using alternative scenarios and certain adjustments to portfolios to credibly reflect current economic and banking conditions.”

Although market-based indicators of bank health — such as the market leverage ratio and credit default swap spreads —deteriorated in February and March, the Fed noted that neither of those indicators sunk to the levels of the 2008 financial crisis.

“This may reflect the belief by investors that banks are more resilient and better positioned today than during the 2008 financial crisis,” the Fed said.

Banks have also increasingly been facing varying operational challenges during the pandemic, and have had to either close or limit access to bank branches, and have had to act on business continuity plans to allow for staff to work from home, the Fed said.

Banks' loan balances swelled in March, and most of those loans were made to existing customers, while lending to other borrowers grew at a smaller rate, ith the exception of borrowers seeking commercial and industrial loans. In the Fed’s most recent senior loan officer opinion survey published last week, the central bank found that the demand for commercial and industrial loans increased during the first quarter.

The Fed also analyzed the earnings of large U.S. banks and found that earnings decreased by more than 50% during the first quarter of 2020 compared with the first quarter of 2019, driven largely by higher loan loss provisions.

Large U.S. banks also reported slightly lower capital ratios for the first quarter of 2020, but none came close to dipping below regulatory requirements, the Fed said. For the 22 U.S. bank holding companies with assets of more than $100 billion, Common Equity Tier 1 capital fell to 11% in aggregate during the first quarter from 11.5% at the end of the last quarter of 2019.

“Strong growth in risk-weighted assets, the denominator of the CET1 capital ratio, rather than reductions in the actual amount of capital, was the main driver of lower capital ratios,” the Fed said. “The increase in risk-weighted assets was a result of increased lending in the first quarter.”

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Lending Coronavirus Deposits Federal Reserve Stress tests Capital Earnings
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