FDIC Publishes 2023 Risk Review

The FDIC most recently outlined in the “2023 Risk Review” report an overview of banking conditions, including key risks to banks related to credit risk, market risk, operational risk, crypto risk, and climate-related financial risk.  The FDIC continues to closely monitor liquidity and deposit trends across the banking industry, especially with recent bank failures in early 2023.  While the FDIC boosts that the banking industry demonstrated resilience despite weaker economic conditions, high-interest rates, high inflation, and financial market stress during 2023, it will continue to monitor banking conditions heavily along with additional adverse market developments. 

Key Risk Summary Reported to Banks:

Credit Risks ~ Asset quality was reported to have remained generally favorable in early 2023, even with challenging economic conditions around the bank loan portfolios, credit card, commercial, residential real estate, and commercial real estate loans. 

Market Risks ~ Effects of higher interest rates and higher funding costs reduced net interest margins during 2023.  Higher interest rates remain a significant source of liquidity risk for banks.

Operational Risks ~ The Banking systems remain vulnerable to cyber-attacks, including ransomware attacks and threats against 3^rd party service providers.  While operational risk remains one of the most critical risks to banks, the FDIC stressed the importance of robust customer due diligence policies and anti-money laundering programs within the banking industry.

Crypto Risks ~ The FDIC continues to see banks' rising interest and engagement in crypto-asset-related activities, even with significant market volatility during 2022.  As a result, they have developed processes to engage in robust supervisory discussions with banking organizations regarding proposed and existing crypto activities and provide case-by-case supervisory feedback.

Climate-related Financial Risk ~ Discussion in this area focuses on physical risk from severe weather and climate events that result in costly damages, especially during 2022.  These events included three hurricanes, wildfires, and drought conditions.  The FDIC is expanding efforts to understand climate-related financial risks in an analytical risk-based approach and collaboration with other supervisors in the industry. 

In summary, the 2023 Risk Review identifies the FDIC’s assessment of risk related to conditions in the US economy, financial markets, and the banking industry. It pays particular attention to risks that may affect community banks since they have a unique perspective on these institutions.