Fed Report: Banking System Remains Strong, Fintech Risk Assessment Intensifies

The banking system remained broadly sound, with strong capital and liquidity and improving asset quality in the second half of 2021, according to the Federal Reserve’s latest supervisory and regulatory report released today. The Fed said risk monitoring will continue for the potential effects of the pandemic and new geopolitical risks, including Russia’s invasion of Ukraine.

The banking sector ended 2021 with strong capital positions, the report notes. Since the start of the pandemic, the industry has added nearly $230 billion in additional Tier 1 capital, providing loan support and loss protection. The strong growth in deposits stimulated the increase in liquid assets and enabled banks to reduce their reliance on more volatile forms of funding. Bank profitability declined in the last three quarters of 2021, but remains solid and comparable to pre-pandemic levels, according to the report. The decline was driven by reduced benefits from negative provision charges and lower trading revenue from large banks.

The Fed said it would continue to focus on capital and liquidity management, as well as cybersecurity. The Fed is also examining the risks created by the increasing use of technology by financial institutions and improving its supervisory approaches to respond to these risks.

“Banks are expected to ensure that appropriate controls are in place to support new fintech products and services,” the Fed wrote. “As banks engage in these activities, they need to develop and implement risk management practices and controls at a pace that aligns with their growth.”

The report notes that while all sizes of banks have embraced fintech, approaches to adopting it vary across banking segments. The Fed has implemented a Fintech system monitoring program to assess the range of risks associated with fintech. The program develops a “coordinated supervision strategy” which will be adapted to the size and complexity of a bank. The report also notes that US banks have beefed up their cyber defenses in response to geopolitical tensions.

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