COVID-19-Related Impact on the #Banking #Industry: Conditions in the Second Quarter 2021.
Bank regulation is designed to allow banks to withstand some amount of unexpected losses. Some observers have worried that the economic ramifications of the Coronavirus Disease 2019 (COVID-19) pandemic could result in enough borrowers missing loan payments to cause distress for banks. This Insight presents bank industry statistics through the second quarter 2021 and examines how the pandemic might be affecting the industry.
Background.
Economic downturns jeopardize bank income as the likelihood of losses from missed payments increases, ultimately reducing bank profitability. Meanwhile, bank liabilities—the deposits they hold and the debt they owe—obligate banks to make funds available to depositors and creditors. If borrower repayments decline enough, a bank’s ability to meet its obligations could become impaired, potentially causing it to fail. In contrast, bank capital—largely equity stock and retained profits from earlier periods—enables a bank to absorb a certain amount of losses without failing. For this reason, bank regulators require banks to hold certain amounts of capital (in addition to subjecting them to a variety of safety and soundness regulations) to avoid failures.
Certain effects of, and bank responses to, economic downturns—such as reduced income and increased credit loss reserves (discussed below)—occur shortly after the onset of economic deterioration. Other effects—such as increased loan delinquency, incurred losses, and reduced capital value—occur after a longer lag. (See CRS Insight IN11501, COVID-19 Impact on the Banking Industry: Lag Between Recession and Bank Distress.) Currently, the bank industry appears to be holding up well. However, as the pandemic continues to affect the economy and the option to request loan forbearances expired on September 30, 2021, signs of stress may begin to emerge.
The Federal Deposit Insurance Corporation (#FDIC) releases comprehensive data on bank conditions and quarterly income. The Quarterly Banking Profile: Second Quarter 2021 reports aggregate data from all 4,951 FDIC-insured institutions as of June 30, 2021.
#Income and Loss #Reserves.
The profit for the banking industry in the first six months of 2021 was $146.7 billion (see Table 1), nearly a 300% increase from the first six months of 2020. The year-over-year increase came mainly from banks decreasing credit loss reserves as the economic risks of the pandemic declined. Credit loss reserves account for potential future losses on loans and other assets by adjusting income on those loans and assets. Banks greatly increased reserves early in the pandemic, likely in response to the fear that the pandemic would cause widespread losses—accounting for $132.2 billion in credit loss expenses in 2020, a 140% increase from 2019 expenses at $55.1 billion.
Another possible contributing factor to the increase in credit loss reserves in early 2020 might have been the adoption of a new credit loss reserve standard—Current Expected Credit Loss (CECL)—which requires earlier recognition of losses. Although the largest banks were required to implement CECL beginning December 15, 2019, the CARES Act (P.L. 116-136) delayed the authority of the regulators to require banks to use CECL until the earlier of the end of the public health emergency or the end of 2020.
The bank regulators also gave banks the option to delay the use of CECL for two years, followed by a three-year transition period. To date, 319 banks have made the transition to using CECL, and 4,632 banks have not. Reportedly, most of the largest banks, collectively holding nearly 80% of the industry’s assets, are among those using CECL. This makes it difficult to determine precisely to what extent the recent changes in loss reserve statistics are the result of the accounting change or the pandemic. (For more information on CECL, see CRS Report R45339, Banking: Current Expected Credit Loss (CECL)).
#Loan Performance and #Capital.
Loan performance and capital levels—two indicators that deteriorate after a time lag—have yet to be significantly affected by the pandemic.
The noncurrent loan rate (i.e., percent of loans more than 90 days past due or in nonaccrual status) decreased during the first six months of 2021 as compared to 2020. However, as part of an exception allowed under the CARES Act, banks are not yet reporting loans in forbearance as noncurrent. The noncurrent rate as of the second quarter 2021 was 1.01%, a decrease from the second quarter 2020 at 1.08%, (see Table 2). For context, after the 2007-2009 financial crisis, the rate peaked at 5.46% in the first quarter of 2010.
Loan charge-offs (when a bank gives up on a loan and writes off the loan’s reported value from its assets) in the second quarter 2021 were less than a year ago. The net charge-off rate was 0.27%, down from 0.55% a year earlier. The post-#financial #crisis rate...
