2021 Risk Review | 21

Section III: Key Risks to Banks

CREDIT RISK

Agriculture

• Agricultural producers weathered the volatile 2020 marketplace with the help of record levels of government 

assistance and a rebound in commodity prices. 

• Despite improving agricultural market fundamentals, net farm income is expected to decrease in 2021 from 

last year because of lower direct government farm payments. 

• Strong farmland equity has enabled farmers to restructure loans to manage operating losses and replenish 

working capital, minimizing agricultural credit problems at insured institutions. 

As of fourth quarter 2020, there were 1,163 farm banks comprising nearly one-quarter of all FDIC-insured 

institutions. All but nine of these banks are also considered community banks by the FDIC’s definition (see

Glossary of Terms). In fourth quarter 2020, agricultural loans held by FDIC-insured institutions totaled $175 

billion. 

• Community banks hold 71 percent ($123 billion) of total agricultural loans.

• Twenty-five percent of farm banks (6 percent of all banks) hold a concentration of agricultural loans above 

300 percent of capital (tier 1 capital and credit loss reserves for loans and leases).

• Exposure to agricultural lending is concentrated in the Midwest. 

Regional Exposure to Agricultural Lending

Dots on map represent banks with total agricultural loans above 300 percent of capital.

Source: FDIC.
22 | 2021 Risk Review

The agricultural industry encountered significant 

volatility in 2020, but conditions improved by year 

end. The Phase 1 trade agreement between the United 

States and China, signed in early 2020, was expected 

to benefit the agricultural industry by reducing 

uncertainty with one of the nation’s largest export 

markets for agricultural products. Unfortunately, the 

COVID-19 pandemic quickly changed the landscape for 

farmers. 

Initially, the pandemic-induced shutdowns caused 

significant disruptions for U.S. agricultural producers 

as food demand and supply chains were disrupted. 

Closures of schools and entertainment venues and 

declines in restaurant dining and travel created a sudden 

drop in commercial demand for food products. In some 

instances, such as in dairy and fresh produce, farmers 

dumped their products because they had no buyers. 

COVID-19 outbreaks among workers at meat-processing 

facilities across the country caused shutdowns that 

created processing bottlenecks and backlogs of 

market-ready cattle and hogs, forcing some growers to 

euthanize animals. Ethanol production declined sharply 

as gasoline demand fell during the initial months of the 

pandemic, dragging down corn prices. 

Prospects improved in the second half of 2020. The 

record level of government assistance and a rebound in 

commodity prices largely due to rising exports combined 

to reverse pandemic-induced losses. According to the 

U.S. Department of Agriculture (USDA), net farm income, 

a broad measure of profitability, reached $121.1 billion 

in 2020, an increase of 46 percent from the 2019 level 

(Chart 18). 

Unprecedented levels of government assistance played 

a significant role in helping agricultural producers 

withstand the volatile marketplace. Producers received 

$32.4 billion in pandemic-related relief payments, 

boosting total direct government payments in 2020 

to an all-time high $46.3 billion. Government payments 

accounted for 38.2 percent of net farm income in 2020, 

the largest percentage in more than 15 years. 

A resurgence in export demand helped commodity 

prices recover in the latter half of 2020. Since early 2018, 

U.S. agricultural producers have faced international 

trade challenges because of ongoing trade disputes with 

key agricultural trading partners, including China. China 

has emerged as one of the top export markets for U.S. 

agricultural goods. In the latter half of 2020, the level 

of exports to China increased significantly as China 

continued to battle African swine fever, which has 

decimated its pork production. During 2020, China’s 

imports of U.S. pork increased 75 percent from the year 

before. 

Rebuilding of China’s hog herd also created a need 

for additional feed, resulting in strong imports of U.S. 

corn and soybeans. Corn exports to China reached 

their second highest level in 2020, and soybean exports 

Record Government Payments Helped Net Farm Income Recover 

in 2020

11.0 9.8 10.8 13.0 11.5 13.7 22.4

46.3

25.3

112.7

82.5 70.9

49.3

63.6 67.6 60.7

74.9

86.1

0

20

40

60

80

100

120

140

2013 2014 2015 2016 2017 2018 2019 2020 2021F

Net Farm Income Minus Government Payments

Government Payments

Total Net Farm Income

$ Billions, nominal

123.7

92.2

81.7

75.1 81.3 83.1

121.1

111.4

62.3

Source: U.S. Department of Agriculture (Haver Analytics).

Note: F=USDA forecast data.

Chart 18
2021 Risk Review | 23

increased 77 percent (Chart 19). The increase in exports 

propelled strong price rallies of these commodities in 

the latter half of 2020 (Chart 20).

Despite improving agricultural market fundamentals, 

net farm income is forecast to decrease because 

of lower direct government farm payments. Farm 

incomes are expected to fall $10 billion (8.1 percent) in 

2021 but remain above the historical average, according 

to the USDA’s 2021 forecast.12

Government payments are expected to decline 

45.3 percent on lower anticipated ad hoc disaster 

assistance for the pandemic. Stronger commodity prices 

and higher export levels are forecast throughout 2021 

and should benefit U.S. crop and livestock producers and 

partially offset a drop in government farm payments. 

Cash receipts for crop producers are expected to increase 

$11.8 billion (5.8 percent) from 2020 with higher cash 

receipts for corn and soybeans more than offsetting lower 

receipts for fruits, vegetables, and cotton. Cash receipts 

for livestock products are forecast to increase $8.6 

billion (5.2 percent) in 2021 with higher cash receipts for 

cattle, poultry, and hogs more than offsetting lower cash 

receipts for milk and eggs. 

12USDA, 2021 Farm Sector Income Forecast, February 05, 2021, https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/farm-sector-incomeforecast/.

Strong farmland equity has helped farmers restructure 

loans to manage operating losses and replenish 

working capital. Farmland values typically account 

for the vast majority of total farm assets, making the 

stability of these values important to agricultural 

producers and their lenders. Nationally, real farmland 

values increased 81 percent from 2005 through 2015 

(Chart 21). In the eight Midwestern states home 

Agricultural Exports to China Increased in Late 2020

0

100

200

300

400

500

600

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20

Soybeans (Le Axis)

Pork (Right Axis)

Corn (Right Axis)

U.S. Exports to China

$ Billions, nominal

U.S. Exports to China

$ Millions, nominal

Source: U.S. Department of Agriculture.

Note: Data are monthly figures from January 2017 through December 2020. 

Chart 19

The Increase in Exports Boosted Futures Prices

60

70

80

90

100

110

120

130

140

Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20

Soybean

Pork

Corn

Futures Price, First Expiring Contract

2019=100

Source: CME Group (Haver Analytics).

Note: Data are monthly figures from January 2017 through December 2020. 

Chart 20

Inflation-Adjusted Farmland Values Have Plateaued 

but Remain High

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Average Farm Real Estate Value

Dollars per acre, real

Source: U.S. Department of Agriculture (Haver Analytics).

Note: Figures are inflation-adjusted using the U.S. Department of 

Agriculture’s GDP deflator.

Chart 21
24 | 2021 Risk Review

to headquarters of the highest numbers of highly 

concentrated farm banks (collectively, 87 percent of all 

banks shown in the map above), changes in farm real 

estate values generally were even higher during that 

period.13

Since 2015, changes in farmland values have moderated. 

In 2020, the USDA Farmland Values survey reported 

average U.S. farm real estate values were unchanged at 

$3,160 per acre, relative to 2019. In the eight Midwestern 

states, changes in farm real estate values in 2020 ranged 

from a 3.1 percent decline in Kansas to a 1.6 percent 

increase in Illinois. The stability in farmland values has 

been mainly due to low interest rates, a limited amount 

of farmland for sale, and ongoing demand for farmland. 

Favorable farmland values have helped cushion farmers’ 

financial stress during periods of crop price volatility. 

Many farmers who had operating shortfalls in recent 

years have been able to restructure those shortfalls 

using their farmland equity. According to the USDA, 

farm sector equity is forecast to remain steady in 2021 

with inflation-adjusted equity decreasing only modestly 

(.01 percent). The debt-to-equity ratio is forecast at 

16.1 percent, which is unchanged from 2020 and 

moderate by historical measures. 

13The eight states with the highest number of highly concentrated farm banks are Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.

Farm banks reported improved asset quality in 2020, 

but demand for agricultural loans weakened. In fourth 

quarter 2020, the median agricultural past-due and 

nonaccrual (PDNA) loan ratio decreased to 0.28 percent 

from 0.48 percent a year earlier. As of fourth quarter 

2020, one in five institutions reported an agricultural 

PDNA ratio greater than 2 percent, while 7 percent of 

institutions reported a ratio greater than 5 percent 

(Chart 22). Farm banks with increased PDNA loans are 

not clustered by geography or by agricultural loan 

concentration levels. 

Charge-offs rates also remained low (Chart 23). As of 

fourth quarter 2020, just 22.7 percent of farm banks 

reported agricultural loan charge-offs, a slight decrease 

from a year earlier. The median level of agricultural 

loan charge-offs at these institutions was 0.15 percent, 

which is also down slightly from one year before and 

well below levels seen during previous agricultural 

downturns. Past-due and charge-off ratios might 

have been higher in recent years if not for the debt 

restructurings facilitated by favorable farmland values.

A decline in loan demand last year led to a decrease in 

agricultural loans held by farm banks. More than half 

of farm banks reported a decline in agricultural loan 

volume in fourth quarter 2020 from one year earlier. 

Asset Quality at Farm Banks Improved Modestly

46.1 43.5 41.1 38.2 34.1 31.4 36.7

44.0 44.2 42.1 43.2 45.6 43.7 42.3

7.6 9.5 12.4 12.7 13.4 17.3 13.8

1.8 2.2 3.1 4.5 5.1 5.6 5.3

0.4 0.6 1.3 1.3 1.8 2.1 1.8

0

20

40

60

80

100

2014 2015 2016 2017 2018 2019 2020

0% 0% – 2% 2% – 5% 5% – 10% GT 10%

Shares of Farm Banks by Agricultural Loan Delinquency Buckets

Percent

Source: FDIC.

Note: Data as of fourth quarter for each year.

Chart 22

The Charge-Off Rate on Agricultural Loans 

Remained Low at Year-End 2020

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0

5

10

15

20

25

30

2014 2015 2016 2017 2018 2019 2020

Agricultural Loan Net Charge-Off Rate (Right Axis)

Share of Farm Banks Reporting Agricultural Loan

Losses (Left Axis)

Median

Percent Percent

Source: FDIC.

Note: Data as of fourth quarter for each year. Charge-off rate among farm 

banks reporting agricultural loan losses.

Chart 23
2021 Risk Review | 25

Agricultural Loan Demand Has Fallen, Leading to a Decline in Agricultural 

Loan Growth

80

90

100

110

120

130

140

-6

-4

-2

0

2

4

6

8

10

12

2014 2015 2016 2017 2018 2019 2020

Loan Growth (Left Axis)

Chicago Survey (Right Axis)

Kansas City Survey (Right Axis)

Minneapolis Survey (Right Axis)

Median Year-Over-Year Agricultural Loan Growth

Percent

Survey Responses

Index value

Sources: FDIC and Federal Reserve District Agricultural Credit Surveys (Chicago, Kansas City, and Minneapolis). 

Note: Data as of fourth quarter for each year. Agricultural loan growth is shown among farm banks. Survey 

responses from bankers, indicating whether loan demand was higher than, less than, or the same as a year 

earlier. Index values below 100 indicate a decline in loan demand.

Chart 24

The median agricultural loan growth rate was negative 

2.8 percent in fourth quarter 2020. The decline in 

agricultural loan volume mirrors results from several 

Federal Reserve Bank surveys that indicated widespread 

declines in agricultural loan demand (Chart 24). 

The median agricultural loan to capital concentration 

ratio fell for the second consecutive year to 224 percent 

from 228 percent as demand for loans weakened. 

The decline in the ratio was widespread, even 

among institutions with very high concentrations of 

agricultural loans. The number of these institutions—

those with agricultural loans greater than 500 percent of 

capital—decreased to 26 (2.2 percent of farm banks) in 

fourth quarter 2020 from 58 (4.5 percent of farm banks) 

a year earlier. 
26 | 2021 Risk Review

Commercial Real Estate

• The pandemic challenged the CRE industry in 2020: lodging and retail sectors were hit hard early in the 

pandemic, and uncertainty emerged in other sectors. 

• The pandemic’s progress and potential shifts in behavior and preferences may influence the outlook for CRE.

• CRE loans held by FDIC-insured institutions reached a record high at year-end 2020. 

• CRE asset quality was stable at year-end 2020 as loan accommodations became part of the lending landscape.

In fourth quarter 2020, CRE loans held by FDIC-insured institutions totaled nearly $2.6 trillion.

• Community banks hold 28 percent (about $725 billion) of total CRE loans.

• Nearly 26 percent of all banks hold an elevated concentration of CRE loans (defined as total CRE 

loans above 300 percent of tier 1 capital and credit loss reserves for loans and leases; or acquisition, 

development, and construction (ADC) loans above 100 percent of tier 1 capital and credit loss reserves for 

loans and leases).

Regional Exposure to CRE Lending

Dots on map represent the 1,292 banks with a concentration of CRE loans, as defined above.

Source: FDIC.

Note: U.S. territories are not included in the map; one bank in Guam with a concentration of CRE loans is not shown.
2021 Risk Review | 27

Lodging and retail sectors were hit hard early in 

the pandemic. Hotels, restaurants, and retail stores 

closed at the pandemic’s onset, causing immediate 

stress across the lodging and retail sectors. The U.S. 

hotel occupancy rate dropped sharply from more than 

60 percent pre-pandemic to less than 25 percent in April 

2020. In luxury hotels, the occupancy rate dropped to 

single digits (Chart 25). While overall occupancy rates 

have improved from 2020 lows, occupancy remained 

well below pre-pandemic levels in early 2021.

The drop in hotel occupancy sharply reduced hotel 

revenues. Hotel revenues fell by 80 percent in April 2020 

compared with the previous year but partially recovered 

by year end.14

Differentiation in the hotel sector is contributing to 

uneven performance. Urban and luxury properties 

are recovering more slowly than other hotel types 

such as extended-stay and hotels in regional, drive-to 

destinations. Improving performance in the latter two 

categories signals the emerging but slow return of 

leisure travel. The urban hotel sector continues to suffer 

from the slower return of corporate travel, an important 

source of revenue for urban hotels. While leisure travel 

accounts for the largest share of room nights, group and 

corporate travel account for roughly two-thirds of hotel 

revenues. The outlook for leisure travel may improve 

14 JPMorgan North America Equity Research, Lodging Weekly Trends, January 13, 2021.

15Coresight Research. Annual store closures ranged from 4,300 in 2016 to 8,700 in 2020.

16 Ibid.

once a large share of the population is vaccinated, but 

the resumption of corporate travel to pre-pandemic 

levels is uncertain as companies re-evaluate their travel 

needs. Industry reports suggest that some urban hotel 

markets may not return to pre-pandemic revenue levels 

for years.

In the retail sector, the pandemic accelerated the 

long-term challenge that online shopping poses to 

brick-and-mortar stores. E-commerce has been eroding 

brick-and-mortar market share for years, a dynamic that 

intensified during the pandemic. Online retail sales grew 

32 percent in 2020, well above the 17 percent growth 

in 2019. As of fourth quarter 2020, online retail sales 

accounted for more than 14 percent of all retail sales, up 

from 10 percent in fourth quarter 2018. 

As consumer foot traffic dropped during the pandemic, 

the brick-and-mortar retail sector further weakened. 

Despite re-openings late in the year, 2020 marked the 

fourth consecutive year of elevated retail store closings.15

According to research firm Coresight Research, store 

closures are expected to rise again in 2021.16

Many office markets are facing weak conditions, 

as firms responded to the pandemic by allowing 

employees to work from home. Most companies are 

re-evaluating their office space needs and offering the 

Luxury and Urban Hotels Are Challenged

0

10

20

30

40

50

60

70

80

Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20

Nation Luxury Urban

Occupancy Rate

Percent

Source: JPMorgan North America Equity Research.

Note: Data are monthly through December 2020.

Chart 25
28 | 2021 Risk Review

ability to work from home. Widespread work-fromhome has led firms in several high-cost and techfocused markets to offer some of their office space for 

sublease, enabling them to trim their office footprint. 

San Francisco, New York, and Seattle each have large 

amounts of space available to sublease.17 Some firms 

have elected not to renew leases, or to renew for shorter 

terms. Weakness has been most apparent in large, 

higher-cost, densely-populated, gateway markets that 

rely heavily on public transportation. Washington, D.C., 

Los Angeles, and Boston are among the large markets 

with the sharpest increases in vacancy rates and growing 

sublease availability. With few exceptions, lower-cost 

smaller markets have not been affected as severely. 

Real estate firm CoStar projects that, in aggregate, both 

the volume and the share of office space returned to 

the market as a result of the pandemic will exceed that 

of the Great Recession.18 Vacancy rates are expected to 

increase but recover more quickly in this cycle than in 

the Great Recession because of the underlying strength 

of the current economy. The typical long-term nature 

of office leases may have forestalled additional strain 

in the office sector. As current leases become eligible 

for renewal, the office landscape may change in some 

markets as firms re-evaluate their space needs and 

remote work policies. 

Effects of the pandemic across multifamily properties 

nationwide was limited in 2020, but the risk of excess 

supply remains a concern in some markets. Nationally, 

the percentage of apartment rent payments made by the 

end of the month declined only slightly, from 96 percent 

in December 2019 to 94 percent in December 2020.19

Some multifamily properties may become strained if the 

share of timely rent payments declines. Employment in 

the retail sector and the leisure and hospitality sector, 

which are among the lowest-paying sectors, declined 

disproportionately during the pandemic. Lower-income 

individuals tend to rent.20 Multifamily construction eased 

in 2020, but excess supply remains a challenge in some 

markets. Over the past six years, the pace of construction 

17 FDIC analysis of CoStar data. Data through fourth quarter 2020.

18 Ibid.

19National Multifamily Housing Council, Rent Payment Tracker, January 8, 2021.

20Center on Budget and Policy Priorities, “Census: Income-Rent Gap Grew in 2018,” September 27, 2019.

21 FDIC analysis of CoStar data. Data through fourth quarter 2020.

22E-commerce is logistics-intensive, and warehouse space is required at transportation hubs and close to “last-mile” population centers. Transportation management 

firm Cerasis defines last-mile logistics as the final step of the delivery process from a distribution center or facility to the end user.

23 FDIC analysis of CoStar data. Data through fourth quarter 2020. 

24Green Street Commercial Property Price Index as of February 9, 2021.

25 FDIC analysis of CoStar data. Data through fourth quarter 2020. 

of multifamily properties was brisk. Although the 

pipeline of units under construction declined last year, it 

remained elevated on a national level (Chart 26).

Much of the supply added in the past year is in the 

South and the West, regions with strong population 

growth. New supply is expected to be more widespread, 

including in the Northeast, where the population in 

many states is growing slowly or declining.21 Significant 

supply growth in recent years placed downward 

pressure on rents. Multifamily rent growth slowed 

in almost half of the markets nationwide between 

fourth quarter 2019 and fourth quarter 2020, and rents 

declined in more than 9 percent of markets.

The industrial sector benefited from increased demand 

for space to support e-commerce.

22 For most of the past 

decade, demand for industrial space exceeded supply. 

This imbalance helped push the U.S. industrial property 

vacancy rate to a cycle low 4.7 percent in 2018. Increased 

e-commerce activity during the pandemic contributed 

to a record level of leased industrial space at year-end 

2020.23 While demand for industrial space increased in 

fourth quarter 2020, supply also increased and industrial 

vacancies inched up nationwide. Markets with a large 

amount of industrial space under construction are 

primarily located in the South and West.

The pandemic’s progress and potential shifts in 

behavior and preferences may influence the outlook 

for CRE across property segments. CRE prices declined 

at the onset of the pandemic and remained lower than 

pre-pandemic levels across most property types at yearend 2020 (Chart 27).24 According to CoStar, sales across 

all property types increased by year-end 2020 from lows 

earlier in the year.25

Because changes in CRE tend to lag changes in the 

broader economy, it is possible that the worst effects of 

the pandemic have yet to be seen. It is also possible that 

the widening circle of people vaccinated will help the 

CRE sector avoid some of the more pessimistic forecasts 
2021 Risk Review | 29

Multifamily Construction Declined in 2020 but Remains Elevated

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2006 2008 2010 2012 2014 2016 2018 2020

Multifamily

Oice

Retail

Industrial

Construction Underway as a Share of Inventory

Percent

Source: CoStar.

Note: Data are quarterly through fourth quarter 2020. Multifamily is measured in units. The other property types 

are measured in square feet.

Chart 26

made by industry experts at the onset of the crisis. 

Ultimately, conditions in the various types of CRE will 

reflect many factors including the pandemic’s effects 

on consumer shopping habits, business and leisure 

travel preferences, companies’ use of remote work and 

preferred locations of office space, housing preferences, 

and the pace of economic recovery.

CRE loans held by FDIC-insured institutions reached a 

record high at year-end 2020. FDIC-insured institutions 

remain heavily invested in CRE loans. Aggregate CRE 

loans reached a record high in 2020, and CRE lending 

represents the largest loan category in more than 

40 percent of banks. FDIC-insured institutions held 

nearly $2.6 trillion of CRE loans as of fourth quarter 2020, 

well above the prior CRE cycle’s expansionary peak 

of $1.9 trillion in fourth quarter 2008. Through fourth 

quarter 2020, FDIC-insured institutions experienced 

33 consecutive quarters of year-over-year CRE loan 

growth. Nonfarm nonresidential CRE loans remain the 

largest segment of CRE loans at more than 60 percent 

Commercial Real Estate Property Prices Have Remained Relatively Stable 

Since Early 2020, Except in the Industrial Sector

50

60

70

80

90

100

110

Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20

All Property Apartment Industrial

Oice Lodging Retail

Indexed Price Change From Onset of the Pandemic

Feb. 2020 = 100

Source: Green Street Advisors.

Note: Data are monthly as of December 2020.

Chart 27
30 | 2021 Risk Review

of the total. ADC loans—historically, a riskier category 

of CRE loans—grew slightly in 2020 and totaled $385.9 

billion at the end of the year, nearly 40 percent below 

the 2008 peak (Chart 28). Nearly a quarter of the banking 

industry’s total CRE loan volume, $627.7 billion, is 

held at institutions in the Northeast. Institutions in the 

Southeast and in the North Central regions each hold 

17 to 18 percent of the banking industry’s total CRE loan 

volume. FDIC-insured institutions are further exposed 

to CRE through their holdings of commercial mortgagebacked securities (CMBS) (see inset box on next page). 

While banks do not provide data on CRE sector-specific 

risk exposures in their quarterly Consolidated Reports of 

Condition and Income (Call Reports), industry sources 

suggest that regional and local banks, many of which are 

similar in profile to community banks, are active lenders 

to multiple CRE sectors. According to real estate firm 

Real Capital Analytics, regional and local banks’ lending 

market share has been significant in recent years in 

several property types, including industrial and retail.26

Although CRE loan balances ended 2020 at a record 

high, CRE loans as a percent of capital declined in 2020 

and remained below the 2008 peak.27 As of fourth 

quarter 2020, the median ratio of CRE loans to capital 

nationwide was about 181 percent, down slightly from 

26 FDIC analysis of Real Capital Analytics data.

27 For this analysis, capital is defined as tier 1 capital and credit loss reserves for loans and leases. An elevated concentration of CRE loans is defined as total CRE loans 

above 300 percent of capital, or ADC loans above 100 percent of capital.

185 percent a year earlier and below the 214 percent 

high reached in the prior cycle. Institutions in the West 

had the highest median at 283 percent in fourth quarter, 

followed by institutions in the Northeast at 235 percent.

The share of banks with elevated exposure to CRE 

loans relative to capital has declined from the 2008 

peak. At year-end 2020, nearly 26 percent of FDICinsured institutions held an elevated concentration of 

CRE loans, slightly below the share at year-end 2019 

and down considerably from 39 percent at the 2008 

cycle peak. Institutions in the South accounted for the 

largest portion (24 percent) of the 1,292 institutions with 

elevated CRE concentrations in fourth quarter 2020. 

CRE lending remains important to community banks.

Community banks held 28 percent of CRE loans but 

only about 16 percent of total loans as of fourth quarter 

2020. The volume of CRE loans held by community 

banks approached $725 billion at year-end 2020, up 

slightly from the previous year and nearly 20 percent 

more than at the industry’s 2008 peak. In fourth quarter 

2020, one-quarter of community banks held an elevated 

concentration of CRE loans to capital, down from 

37 percent in fourth quarter 2008. Additional information 

about community banks’ role in the U.S. CRE lending 

landscape and exposure to various property types can 

Commercial Real Estate Lending at FDIC-Insured Institutions Continues to 

Grow

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

$ Trillions

CRE Not Secured by Real Estate

Multifamily

Total Nonfarm Nonresidential

Acquisition, Development, and Construction

Source: FDIC.

Note: Quarterly data, fourth quarter 2007 through fourth quarter 2020.

Chart 28
2021 Risk Review | 31

CMBS Was Strained in 2020

CMBS asset quality measures weakened sharply in first half 2020 but improved through the rest of the 

year. Delinquency rates in the loans underlying CMBS spiked in May 2020. The overall delinquency rate 

among non-agency CMBS loans surpassed 10 percent in June 2020 and ended the month just shy of the 

all-time high reached in July 2012 following the Great Recession. However, following the June 2020 peak, 

the CMBS delinquency rate declined for six consecutive months and ended 2020 just under 8 percent, still 

well above the 2019 level (see chart).

Similar to CRE market conditions, weakness in the CMBS market was largely property-type specific. 

Lodging and retail loans were challenged immediately, while other property sectors experienced only 

modest weakness through 2020. Decline in travel and changes in consumer spending habits against the 

backdrop of public health measures contributed to the weakness in lodging and retail loans. Other factors 

such as the work-from-home paradigm, demographic trends, and fiscal stimulus could take longer to filter 

through other property types. 

FDIC-insured institutions are exposed to CRE through holdings of CMBS, which totaled $487.6 billion at 

year-end 2020. Approximately 39 percent of FDIC-insured institutions hold CMBS, although most hold 

small portfolios relative to capital.

CMBS Delinquencies Spiked, Particularly in Lodging and Retail Loans

0

5

10

15

20

25

30 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20

CMBS Delinquency Rate

Percent

Industrial Oice Multifamily Retail Hotel Total

Source: Trepp.

Note: CMBS is commercial mortgage-backed securities.
32 | 2021 Risk Review

be found in Chapter 4 of the FDIC’s 2020 Community 

Banking Study.

28

CRE asset quality was stable at year-end 2020 and 

more favorable than during the recessionary period 

in the previous CRE cycle. The median CRE loan 

delinquency rate among FDIC-insured institutions was 

0.41 percent in fourth quarter 2020, well below the first 

quarter 2010 peak of 3.85 percent. At year-end 2020, 

the median CRE noncurrent rate was 0.12 percent, up 

only slightly from a year earlier and well below the prior 

cycle’s peak of 2.27 percent.

In 2021, institutions holding CRE loans face significant 

possible challenges, including weakened cash flows 

for some properties and potentially higher interest 

rates and debt servicing costs for some CRE borrowers. 

FDIC-insured institutions have been encouraged to 

28 FDIC, Community Banking Study, December 2020, https://www.fdic.gov/resources/community-banking/report/2020/2020-cbi-study-full.pdf.

work prudently with stressed borrowers during the 

pandemic. In doing so, institutions have embraced 

an array of loan accommodations in their CRE loan 

portfolios. These actions may help CRE borrowers 

navigate the pandemic but can complicate lenders’ 

ability to assess asset quality and potentially defer asset 

quality deterioration. Borrowers who request repeated 

or prolonged loan accommodations may be higher risk. 

Loan accommodations and other forbearance measures 

may obscure traditional measures for loan performance 

metrics and offsite risk identification. Banks also faced 

intense competition for higher-quality CRE loans 

from other banks and from nonbank lenders during 

the strong economic environment that preceded the 

pandemic. The effects on CRE loans underwritten during 

that period may have yet to manifest in asset quality 

measures. 
2021 Risk Review | 33

Consumer Debt

• Government programs helped support household balance sheets and consumer loan performance during the 

pandemic. 

• Consumer loan volumes declined as households pulled back on spending in 2020.

• Consumer conditions may be a key source of credit risk, especially if support for consumers runs out while 

economic conditions remain weak.

Consumer loans held by FDIC-insured institutions totaled $1.7 trillion as of fourth quarter 2020.

• Community banks hold 3.7 percent ($65 billion) of total consumer loans.

• Concentration in the industry remains low; 4.3 percent of all banks hold a high concentration of consumer 

loans above 100 percent of capital (tier 1 capital and credit loss reserves for loans and leases).

• Exposure to consumer lending is not concentrated in any region of the country. 

Regional Exposure to Consumer Lending

Dots on map represent banks with total consumer loans above 100 percent of capital.

Source: FDIC.

Note: U.S. territories are not included in the map; two banks in Puerto Rico and one bank in Guam that have a concentration of consumer 

loans are not shown.
34 | 2021 Risk Review

Government support programs helped boost 

household income growth in 2020. U.S. personal 

income growth rose to 14 percent from a year earlier 

in April 2020, up from 3 percent in December 2019 

(Chart 29). The increase was almost entirely due to 

pandemic relief in the form of government stimulus 

programs, such as the Coronavirus Aid, Relief, and 

Economic Security (CARES) Act. The CARES Act provided 

direct economic impact payments of up to $1,200 

per adult and $500 per child under 17 years old for 

individuals who made less than $99,000 per year and 

joint filers who made less than $198,000 per year.29

From the end of March through June 2020, the Internal 

Revenue Service made 159 million of these payments 

to qualifying individuals. A majority of households who 

received an economic impact payment reported using 

or planning to use the payment for expenses, while 

13 percent reported using it to pay off debt.30

The CARES Act also expanded and extended 

unemployment insurance benefits and created an 

unemployment assistance program that covered 

workers not traditionally covered by unemployment 

insurance. In addition, the federal government paid 

$600 per week in unemployment insurance on top of the 

standard state-run unemployment insurance system. 

In March 2021, a fifth COVID-19 relief bill was signed that 

included a third round of economic impact payments 

and continued the expanded unemployment insurance 

benefits, both of which boosted household income in 

first quarter 2021. 

Consumer lending fell in 2020 as credit card loans 

declined. In fourth quarter 2020, FDIC-insured 

institutions held about $1.7 trillion in consumer loans, 

down 5.1 percent from a year earlier (Chart 30). Credit 

card loans comprise about half of consumer loans at 

banks, with the rest split between auto loans and other 

personal loans. During the pandemic, credit card loan 

balances declined from the 2019 level as consumers 

cut back on spending typically charged on credit cards, 

29Payments were $1,200 per adult for adults who made less than $75,000 (joint filers who made less than $150,000), and phased out for people who made between 

$75,000 and $99,000 per year ($150,000 to $198,000 for joint filers). The Pandemic Unemployment Assistance program made unemployment insurance payments 

available to self-employed people, gig workers, and contract workers for the first time.

30Thesia I. Garner, Adam Safir, and Jake Schild, “Receipt and Use of Stimulus Payments in the Time of the COVID-19 Pandemic,” U.S. Bureau of Labor Statistics, Beyond 

the Numbers 9, no. 10 (August 2020), https://www.bls.gov/opub/btn/volume-9/pdf/receipt-and-use-of-stimulus-payments-in-the-time-of-the-covid-19-pandemic.

pdf; and Peter G. Peterson Foundation, “How Did Americans Spend Their Stimulus Checks and How Did it Affect the Economy?” October 9, 2020,

https://www.pgpf.org/blog/2020/10/how-did-americans-spend-their-stimulus-checks-and-how-did-it-affect-the-economy. 31Data from https://tracktherecovery.org/. 32Board of Governors of the Federal Reserve System, Senior Loan Officer Opinion Survey on Bank Lending Practices, July 2020, https://www.federalreserve.gov/data/

sloos/sloos-202007-table-1.htm.

including restaurants, hotels, travel, and general retail.31

The growth rate of auto and personal loans slowed last 

year, but loan volumes remained above 2019 levels. 

Following the onset of the pandemic, banks tightened 

lending standards for consumer loans as the pandemic 

pushed the economy into a recession. On net, more than 

70 percent of banks tightened lending standards for 

credit cards in second quarter 2020, and more than half 

tightened standards for auto loans and personal loans.32

On net, banks loosened underwriting standards across 

consumer lending segments in the fourth quarter, but 

standards remained tighter than before the pandemic. 

Consumer loan performance was stable in 2020, partly 

because of forbearance programs. Most banks offered 

some form of accommodation for customers affected by 

the pandemic, and these forbearance programs helped 

limit consumer loan delinquencies last year. Noncurrent 

rates on credit cards and other personal loans declined 

in 2020, while the noncurrent rate for auto loans rose 

only slightly (Chart 31). The noncurrent rates for credit 

cards and personal loans ticked up in fourth quarter 

Income Growth Spiked in April From Government 

Transfers

-20

0

20

40

60

80

100

120

2015 2016 2017 2018 2019 2020

Compensation of Employees

Personal Current Transfer Payments

Other Income

Year-Over-Year Growth

Percent

Source: Bureau of Economic Analysis (Haver Analytics).

Note: Data as of December 2020.

Chart 29
2021 Risk Review | 35

2020 from third quarter 2020 but were below fourth 

quarter 2019 levels. Net charge-off rates declined across 

all consumer loan types. In fourth quarter 2020, the 

quarterly net charge-off rate on credit card loans was 

near historic lows. 

In addition, forbearance programs for federally backed 

mortgages and federal student loans have likely 

supported performance of other consumer loans during 

2020. The federal government offered forbearance 

programs on all government-backed mortgages and 

placed most student loans into deferment in 2020. 

Eliminating required payments on these loans may 

have allowed borrowers to repay other loans such as 

consumer loans held by banks.

The outlook for consumer credit remains a key source 

of uncertainty. While forbearance and income support 

programs helped maintain asset quality in 2020, 

the banking industry may experience deterioration 

in consumer credit if these programs run out while 

economic conditions remain weak. 

Consumer Loan Performance at Banks Remains Strong

0.0

0.5

1.0

1.5

2.0

2.5

Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Credit Card Auto Other

Percent of Loans That Are Noncurrent 

Source: FDIC.

Note: Data as of fourth quarter 2020.

Chart 31

Outstanding Amount of Consumer Loans Declined in 2020

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Mar-11 Sep-12 Mar-14 Sep-15 Mar-17 Sep-18 Mar-20

Credit Card Auto Other

Loans Outstanding

$ Millions

Source: FDIC.

Note: Data as of fourth quarter 2020.

Chart 30
36 | 2021 Risk Review

Energy

• The pandemic-induced decline in oil demand, substantial oversupply from a production policy impasse within 

the OPEC+ coalition, and near-record U.S. production led to sharply lower oil prices in second quarter 2020.

• Poor operational performance and escalating environmental, social, and governmental risks contributed to 

capital scarcity for oil and gas producers. 

• Banks with significant exposures to the energy market remained resilient to these market challenges.

33 For this analysis, oil-concentrated states are Alaska, Colorado, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, and Wyoming. Together, these states 

produced 77 percent of U.S. oil production in November 2020.

The oil and gas industry was among the sectors 

most hurt by the pandemic. Oil demand fell sharply 

worldwide as lockdowns severely limited mobility 

and overall economic activity. Domestic oil demand 

plummeted in April 2020 causing a year-over-year 

decline of 27.7 percent and the lowest consumption 

since May 1983. West Texas Intermediate (WTI) crude 

oil prices began 2020 near $60 per barrel and fell to a 

monthly average price of $16.55 per barrel by April. 

In response to weak price signals, the number of active 

drilling rigs in the United States fell to the lowest 

level since records started in 1973, and production 

declined from a record 12.9 million barrels per day in 

November 2019 to 10 million barrels per day in May 

2020. Notwithstanding the severe but short-lived 

declines following Hurricane Katrina and the onset of 

the financial crisis in September 2008, this was the most 

abrupt and largest U.S. oil production decline in modern 

history.

Global oil supplies reached record levels and prices fell 

rapidly, particularly in March and April 2020, because 

of simultaneous shifts in supply and demand. As the 

pandemic’s effects reduced the demand for oil, global 

inventories swelled from a combination of record 

production by the United States and ramped-up 

production by Saudi Arabia and Russia, the two leading 

OPEC+ members who disagreed on the coalition’s 

production policy. 

Resumption of commercial and industrial activity in the 

second half of 2020 and consequential gains in mobility 

translated to greater demand for oil. Market oversupply 

declined after the OPEC+ coalition agreed to substantial 

production quotas and U.S. production fell. When 

prospects for a COVID-19 vaccine began to crystalize, 

swollen inventories began to subside, rig counts 

increased, and WTI crude spot prices began to rally. 

Collectively, these factors contributed to a 36 percent 

increase in WTI spot prices during the last two months of 

2020. 

Mining and logging employment has been among 

the weakest industry sectors since the onset of the 

pandemic. Before the pandemic and the subsequent 

plunge in oil prices, most labor markets in oilconcentrated states had solid employment growth 

and low unemployment rates.33 All but one of these 

states (Wyoming) were at or near their historic low 

unemployment rates at year-end 2019. However, job 

losses rose quickly with the pandemic’s onset, and 

all but one oil-concentrated state (Wyoming) reached 

its record high unemployment rate in April 2020 or 

soon thereafter. Nationwide, the mining and logging 

sector lost 107,500 jobs in 2020; 81 percent of those 

losses occurred in oil-concentrated states. During 

2020, employment in the sector declined 14.0 percent, 

second only to the leisure and hospitality sector. For oilconcentrated states, the decline was more pronounced 

at 27.6 percent year over year.

Economic exposure to the energy sector is concentrated in eight states with oil-reliant economies: Alaska, 

Colorado, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, and Wyoming. 

• Direct loans to the energy sector are primarily held at a small number of large and regional banks. 

• Exposure to the energy sector is focused in the South.
2021 Risk Review | 37

The industry responded to the rapid decline in oil prices 

by pulling back on drilling activity, which contributed to 

deep job losses for the oil and gas and support services 

subsectors (Chart 32). The broader U.S. labor market 

recovered more than 55 percent of the jobs lost since 

the April low by year-end 2020; however, the oil and gas 

extraction and support activities subsectors continued 

to lose jobs throughout 2020. 

Financial performance of oil and gas firms—

particularly for shale oil producers—has been poor, 

and challenges continue. Shale producers accounted 

for almost 65 percent of U.S. production in 2020 and all 

of the growth in U.S. oil production over the ten years 

ending in 2020. Shale oil production initially has high 

production rates but needs a continual flow of new 

wells to replace rapid production declines of existing 

wells. Shale production is therefore a capital intensive 

operation that requires more funding to drill new wells, 

grow reserves, and replenish production. 

The high leverage common to a shale producer’s 

business model also raises vulnerabilities to significant 

oil market volatility, which is historically associated 

with oil and gas markets. Even though U.S. shale oil 

production grew more than 960 percent during the past 

34 Fitch Ratings, High Yield Default Insight Report, March 11, 2021.

35 Haynes and Boone, LLP, Oil Patch Bankruptcy Monitor, November 30, 2020.

decade to record levels, this business model produced 

extremely weak financial performance. Among the 11 

sectors of the S&P 500 Index, energy continued a trend 

as the worst performing sector in 2020, and exploration 

and production (E&P) firms fared particularly poorly 

(Chart 33). 

The energy sector represents the largest share of highyield debt. A year-end 2020 Fitch Ratings report shows 

the energy sector accounted for 15.5 percent of the highyield debt market followed by the banking and finance 

sector with a 9.2 percent market share. The energy 

sector’s 14 percent high-yield bond default rate for 2020 

was second highest of any sector. Given its size, the 

energy sector dominated the dollar volume of defaults. 

Last year, the sector accounted for 41 percent of the 

default volume.34

Weak financial performance, high leverage, and low oil 

prices also prompted an escalation in North American oil 

and gas producer bankruptcies in 2020. Approximately 

$53.8 billion of energy debt was taken into bankruptcy 

in the 11 months through November 2020, the highest 

amount since 2016 and more than twice that of 2019.35

When nascent signals of improving market conditions 

emerged late in 2020, the outlook for the energy 

Oil and Gas Employment and Active Rig Counts 

Plummeted After the Pandemic Was Declared

-1,800

-1,600

-1,400

-1,200

-1,000

-800

-600

-400

-200

0

-250

-200

-150

-100

-50

0

2014 2015 2016 2017 2018 2019 2020

Active Rig Count

Cumulative net change

Oil and Gas Extraction

and Support Activities

Active Rig Count

Employment Count

Cumulative net change, thousands

Pandemic

Declared

Sources: U.S. Bureau of Labor Statistics and Baker Hughes.

Note: Cumulative net change begins December 2014, and monthly data are 

through December 2020.

Chart 32

Oil and Gas Sector Financial Performance Improved 

Somewhat in Fourth Quarter, but Has Been 

Exceedingly Weak Throughout the Pandemic

-28.7

17.4

-70

-60

-50

-40

-30

-20

-10

0

10

20

Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21

Equity Market Performance

Cumulative percent change from January 2, 2020

SPDR S&P Oil & Gas 

Exploration and Production

S&P 500

Source: S&P (Yahoo Finance).

Note: Daily data are from January 2, 2020, through January 8, 2021.

Chart 33
38 | 2021 Risk Review

sector improved. The Fitch Ratings forecast for highyield energy debt defaults declined from 11 percent in 

December 2020 to 4 percent in March 2021. The Federal 

Reserve Bank of Dallas fourth quarter 2020 Energy 

Survey also notes that E&P firms are planning to expand 

capital spending in 2021. 

Although measuring direct bank exposure to oil and 

gas is difficult, examiner assessments conclude that 

few banks have extensive direct credit exposure to 

the energy sector. E&P operations today are primarily 

financed in the capital markets, and bank exposure to oil 

and gas—principally at larger banks—showed declines in 

2020. Nevertheless, while local banks may face indirect 

effects of weakness in the energy sector, community 

banks operating in states with oil-reliant economies 

have shown resilience to oil market downturns. 

Although it may be too early to fully assess the current 

cycle, asset quality deterioration in geographies that rely 

on the energy sector has been mild, despite weak labor 

market fundamentals. At fourth quarter 2020, the pastdue loan rate for community banks headquartered in 

oil-reliant states was 1.1 percent, only slightly above the 

rate for all other states (Chart 34). The median C&I loan 

past-due rate for community banks in oil-concentrated 

states was slightly above (30 basis points) banks in other 

states.36 Indeed, few banks in oil- and gas-concentrated 

areas exhibited severe stress, and no bank failures 

occurred in the concentrated areas during the recent 

period of low oil prices.

Insights of low oil price effects on large banks are 

evident in the Shared National Credit (SNC) report 

for the first and third quarter 2020 reviews.37 The SNC 

program assesses large commitments in excess of $100 

million and shared by multiple regulated financial 

institutions. As an industry significantly affected by the 

pandemic, oil and gas credits were a focal area of the 

report. Notably, the share of all oil and gas commitments 

that were criticized increased from 10.7 percent in 2019 

to 23.3 percent in 2020. The report also commented that 

the increase in classifications at U.S. banks and foreign 

bank offices is largely due to oil and gas and other 

COVID-19 impacted obligors that tend to be more widely 

held by banks. 

36 For comparison, C&I past-due rates exclude PPP loans that were first booked in March 2020. Including the large volume of these loans, that are forgivable and 

federally guaranteed, would otherwise dilute past-due ratios of existing C&I loans. 

37 Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Shared National Credit Program, 

First and Third Quarter 2020 Reviews, February 2021.

The energy transition trend is accelerating and is 

becoming an increasingly important issue across 

the energy sector. Opportunities and risks are also 

accelerating for stakeholders endeavoring to transform 

the global energy sector from fossil fuel production and 

consumption to renewable energy sources. In the long 

term, this means that oil- and gas-concentrated areas 

could play a smaller role in total energy production and 

could therefore see erosion of the sector’s contribution 

to their economies. Similarly, areas with growing 

renewable energy production are positioning to take 

advantage of decarbonization trends. Cost efficiencies 

are raising prospects for transitioning to renewable 

power sources; however, intermittency and battery 

technology are issues that need solutions. 

Energy transition could have implications for lenders. 

Banks are taking climate change and environmental, 

social, and governmental (ESG) risk mitigation into 

consideration. Understanding changes in policy, 

technology, and investor sentiment as they relate to 

ESG risk have become increasingly important as lenders 

Community Banks in Oil-Concentrated States Have 

Proven Resilient to the Rapid and Severe Decline in 

Oil Prices

0

20

40

60

80

100

120

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Oil Price Oil States Other States 

Past-Due Loans

Median, percent

West Texas Intermediate Crude

Dollars per barrel

Right Axis Left Axis

Sources: FDIC and U.S. Energy Information Administration (Haver Analytics).

Note: Includes all community banks, as defined by the December 2012 FDIC 

Community Banking Study. Past-due loans exclude Paycheck Protection 

Program loans. Oil states are Alaska, Colorado, Louisiana, New Mexico, 

North Dakota, Oklahoma, Texas, and Wyoming. Quarterly bank data are 

through fourth quarter 2020, and monthly average oil price data are through 

December 2020.

Chart 34
2021 Risk Review | 39

adapt policy guidance and risk identification, especially 

for those with geographic or financial exposure to 

traditional energy resources.

Although market conditions have improved since 

fourth quarter 2020, risks of continued market 

volatility and longer-term transitional challenges 

remain. Supply restraint decisions by OPEC+ and U.S. 

producers, prospects for further pandemic-related 

lockdowns, the pace of global post-pandemic recovery, 

and delayed distribution and efficacy of vaccines are 

near-term risks that could affect the global economy 

and energy industry performance. For oil and gas firms, 

poor financial performance, volatile market prices, and 

building momentum of energy transition to decarbonize 

energy supplies each represent significant long-term 

challenges. The combination and variety of these risks 

suggest that volatility in the energy sector will remain 

elevated and pose challenges to the sector and its 

lenders.
40 | 2021 Risk Review

Housing 

• Housing activity recovered strongly in 2020; single-family sales reached a 14-year high after a sharp drop in 

activity at the onset of the pandemic. 

• Loan performance metrics of 1–4 family residential mortgage loans at FDIC-insured institutions weakened 

slightly in 2020.

• Increasing competition from nonbanks could pressure bank mortgage lenders going forward.

Residential loans held by FDIC-insured institutions totaled nearly $2.5 trillion as of fourth quarter 2020. 

• Of the $2.5 trillion in residential loans, community banks hold 17 percent ($431 billion).

• Twelve percent of all banks hold a high concentration of residential loans, with residential loans above 

300 percent of capital (tier 1 capital and credit loss reserves for loans and leases).

• Exposure to the residential market, in terms of total residential loans held, is highest in the banks 

headquartered in the Northeast.

Regional Exposure to Residential Lending

Dots on map represent banks with total 1–4 residential loans above 300 percent of capital. 

Source: FDIC.
2021 Risk Review | 41

Housing sales were resilient during the pandemic 

following early signs of stress. Home sales declined 

abruptly in the first few months of the pandemic as 

mandatory lockdowns and concern about the spread 

of the virus contributed to a sharp reduction of activity. 

In May, total single-family home sales had declined 

25 percent on an annual basis, the largest annual decline 

in approximately ten years. In June, existing home sales 

sharply rebounded and trended upward for the second 

half of the year (Chart 35).38 By fourth quarter 2020, 

existing home sales, which account for most total singlefamily home sales, were up 23 percent from fourth quarter 

2019 and new home sales were up 27 percent.39 Although 

existing and new home sales remained below prior peaks 

reached in 2005, pandemic lows were not as severe as 

those in the aftermath of the 2010 housing crisis.40

The high level of home sales reflected strong demand 

for single-family homes that was due to a growing desire 

for more space to accommodate remote work, a shift in 

homebuyer preferences from densely populated urban 

areas to suburban markets, and record low mortgage 

rates. Home buyers and sellers also adopted virtual 

showings instead of traditional on-site visits. Going 

forward, demographics may contribute to increased 

38 National Association of Realtors.

39 Existing single-family home sales from the National Association of Realtors, and new single-family home sales from the U.S. Census Bureau. 

40 Ibid. 

41 CoreLogic. Generation X was born between 1965 and 1979. Millennials were born between 1980 and 1998.

42 National Association of Realtors. Months’ supply of single-family homes data begin in 1983.

demand for homeownership, as forecasts suggest that 

the millennial and Generation X cohorts will account 

for a growing share of household formations and home 

purchases.41

As home sales climbed last year, the supply of homes 

for sale fell to a record low. The inventory of homes 

for sale has trended lower since the last housing 

downturn and was well below a six-month supply, an 

industry benchmark needed for a balanced market. 

The downward trend in inventory before the pandemic 

may be attributed to low levels of construction and a 

low inventory of existing homes for sale. Although the 

inventory increased in second quarter 2020 as sales 

temporarily slowed, inventory as measured by months 

of homes for sale remained well below the historical 

level by year end. By fourth quarter, inventory had 

declined to a record low 2.1 months of supply, down 

nearly 40 percent from fourth quarter 2019 and the 

lowest level on record (Chart 36).42

New home construction increased in the second half 

of 2020 nationwide (Chart 37). By fourth quarter 2020, 

total single-family housing starts were nearly 30 percent 

higher than one year earlier, as builders responded to 

the sudden increase in the demand for single-family 

Home Sales Rebounded After Declines Early in the Pandemic

0

1

2

3

4

5

6

7

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Recession

Existing Home Sales

New Home Sales

Single-Family Home Sales

Millions, seasonally adjusted at annual rate

Sources: Census Bureau, National Association of Realtors, National Bureau of Economic Research (Haver 

Analytics).

Note: Data are monthly figures to December 2020, seasonally adjusted at annual rate. 

Chart 35
42 | 2021 Risk Review

homes. The largest percentage annual increase was in 

the West, which was already producing more homes 

before the pandemic in response to in-migration; the 

smallest increase was in the Northeast, where growth 

was lagging before the pandemic from comparatively 

slower population growth.

Home prices rose sharply in 2020 fueled by strong 

demand, limited supply, and low mortgage rates. 

Home prices rose 9.4 percent on an annual basis in 

43 S&P CoreLogic Case-Shiller Home Price Index.

44 Federal Housing Finance Agency, All Transactions House Price Index.

fourth quarter 2020, outpacing the 3.4 percent growth 

in fourth quarter 2019 and the largest increase in six 

years.43 Home prices rose across all states but increased 

most in Idaho, Arizona, and Utah, where population 

growth has been strong.44

Despite positive home price growth across all states, 

three metros saw home prices decline annually through 

fourth quarter 2020: San Francisco, California; San 

Rafael, California; and Midland, Texas. The largest 

Inventory Has Tightened Further During the Pandemic

0

2

4

6

8

10

12

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Recession

Inventory

Months’ Supply of Single-Family Homes for Sale

Balanced Level of Inventory

6-Month Supply

Sources: National Association of Realtors and National Bureau of Economic Research (Haver Analytics).

Note: Data are monthly figures through December 2020.

Chart 36

Home Starts Rebounded After Initial Pandemic Declines

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Recession

U.S.

Northeast

Midwest

South

West

Single-Family Home Starts

Share of housing stock, percent

Sources: Census Bureau and National Bureau of Economic Research (Haver Analytics).

Note: Data are through fourth quarter 2020. Home starts data are seasonally adjusted at an annual rate, and 

housing stock data for regions are revised.

Chart 37
2021 Risk Review | 43

decline was in San Francisco, followed by smaller, 

marginal declines in nearby San Rafael, and energyfocused Midland.45 The San Francisco Bay Area is home 

to many high-tech companies that have embraced the 

transition to remote work brought on by the pandemic. 

The ability to work remotely contributed to an exodus 

of homeowners from high-cost San Francisco to more 

affordable locations. 

In many areas, home price gains have outpaced income 

growth, which reduced affordability. First-time home 

buyers may be most affected by higher home prices, 

particularly in traditionally more affordable locations 

that have become highly desirable since the pandemic. 

As the demand for homes in locations with more space 

increased during the pandemic, housing affordability 

for established homeowners also is being strained. The 

potential for higher mortgage rates from last year’s 

record lows also may hamper home affordability. 

The volume of 1–4 family residential loans increased 

at a slower rate and was below levels reported during 

the last cycle. Nationally, insured banks reported 

$2.2 trillion in 1–4 family residential loans in fourth 

quarter 2020, a nominal increase from a year earlier.46

Although positive, the most recent increase was slower 

than the 1–4 family residential loan growth reported in 

previous quarters. The sale of 1–4 family mortgages by 

banks and an increased presence of nonbanks in the 

mortgage market contributed to lower growth last year.

The concentration of 1–4 family residential loans to 

capital declined last year to 129 percent, the lowest level 

in 30 years. The median concentration ratio continued to 

be lower among noncommunity banks than community 

45 Ibid. Metro division data for San Francisco and San Rafael, California, and metro area data for Midland, Texas.

46 One-to-four family residential loans exclude revolving and open-end loans.

banks during the quarter. The median concentration 

of 1–4 residential mortgage loans for community 

banks was 132 percent of capital, down from the 

previous year and considerably below the 2009 peak of 

164 percent. Community banks in the West reported the 

lowest median concentration of 1–4 family residential 

mortgages to capital (72 percent) in fourth quarter 

2020, while community banks in the Northeast reported 

the highest median concentration (261 percent). The 

median concentration of 1–4 family residential loans to 

capital for community banks in the Northeast has been 

historically higher, reflecting a concentration of mutual 

savings banks that focus on residential lending (see inset 

box). 

Construction lending, a traditionally higher-risk loan 

segment, has declined. The volume of 1–4 family 

residential construction and development (C&D) loans 

for the industry was down 3.1 percent to $77 billion as 

of fourth quarter 2020 from a year earlier and remains 

significantly below the $186 billion industry peak 

in the previous cycle. Similar to overall 1–4 family 

residential concentrations, institutions reported lower 

concentration of 1–4 family residential C&D loans 

to capital in 2020. As of fourth quarter 2020, only 

3.6 percent of all institutions nationwide held 1–4 family 

residential construction loans at 50 percent or more of 

capital, down significantly from nearly 14 percent at the 

2008 peak. Trends were similar at the regional level; the 

largest declines were at institutions headquartered in 

the South and West (Chart 38).

Loan performance metrics of 1–4 family residential 

mortgage loans weakened slightly in 2020, while the 

residential construction loan past-due rate remained 

Community Banks Continue to Face Competition for 1–4 Family Residential Loans

To compete with other banks, community banks have aggressively priced 1–4 family residential loans, 

particularly community banks headquartered in metropolitan areas. Historically, 1–4 family residential loan 

yields among metro-based community banks have trailed those in non-metro areas given the heightened level 

of competition in metro areas versus rural locations. As of fourth quarter 2020, metro-based community banks 

reported a median 1–4 family residential loan yield of 4.95 percent compared with 5.29 percent for non-metrobased community banks. The difference in yields between the two groups increased in 2020 from prior years.
44 | 2021 Risk Review

low. As of fourth quarter 2020, banks reported an 

aggregate 1–4 family mortgage loan past-due rate of 

3.4 percent, up 71 basis points from a year earlier and 

the sixth consecutive quarterly increase. While trending 

up modestly, the past due rate for 1-4 family residential 

C&D loans industry-wide remained low in 2020 and 

was well below the peak during the Great Recession 

(Chart 39). The increase in the past-due rate was driven 

by higher noncurrent loan balances in the 1–4 family 

mortgage portfolio, including rebooked Government 

National Mortgage Association (Ginnie Mae) loans 

primarily among the industry’s largest institutions.47

Excluding the largest institutions, the year-over-year 

increase in the 1–4 family noncurrent rate last year was 

the largest increase since 2011, but the rate remains 

much lower than the peak during the Great Recession. 

Asset quality measures reported by FDIC-insured 

institutions were muted by various national mortgage 

forbearance moratoria and other federal support 

programs available to mortgage holders affected by the 

pandemic. The number of mortgages in forbearance 

across the nation declined considerably after spiking 

during the pandemic. An estimated 2.5 million 

47 Noncurrent 1–4 family residential loans are those secured by 1–4 residential properties 90 days or more past due and nonaccrual status. The largest institutions are 

those with at least $100 billion in total assets. 

48 Mortgage Bankers Association, “Share of Mortgage Loans in Forbearance Decreases to 4.90 percent,” April 5, 2021.

49 Mortgage banking activity includes the sale, securitization, and servicing of 1–4 family loans.

50 Nationally, 501 insured institutions reported mortgage loan originations and 957 institutions reported mortgage loan sales on their Consolidated Report of 

Conditions and Income in fourth quarter 2020. The 501 institutions that reported originations reported 88 percent of the sales. 

mortgages, 4.9 percent of all mortgages nationally, were 

in forbearance as of March 2021, down significantly from 

the peak of 4.3 million, 8.6 percent of mortgages, nearly 

a year earlier.48 The decline was due to an increased 

number of mortgages exiting forbearance and reduced 

new entrants.  

Strong mortgage loan origination volume contributed 

to higher mortgage-related revenues in 2020.49 As 

mortgage rates reached record lows and home sales 

grew during the year, banks that conduct mortgage 

lending reported higher revenues on increased 1–4 

family loan originations (originations) and loan sales 

(sales). These banks originated $967 billion in 2020, 

up 30.3 percent from 2019.50 Similarly, banks sold $1.1 

trillion of mortgage loans, up 34.5 percent from 2019. 

Both volumes are the highest since 2013. 

The growth in both originations and sales demonstrates 

that banks took advantage of increased refinancing 

activity to generate revenue during a period of 

pandemic-induced economic stress. In 2020, annual 

noninterest income from mortgage banking activity for 

all banks grew 66 percent from 2019. 

The Share of Insured Banking Institutions With High 

1–4 Family Residential Construction Loans Has 

Significantly Declined

0

5

10

15

20

25

30

Midwest Northeast South

2008 2020

Share of Insured Banking Institutions With 1–4 Family

Construction Loans at 50 Percent or More of Capital

West Nation

 Source: FDIC.

Chart 38

One-to-Four Family Residential Loan Portfolios Are 

Reporting Asset Quality Deterioration

0

5

10

15

20

25

30

0

2

4

6

8

10

12

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

1–4 Family Past Due Loan Rate (Le Axis)

1–4 Family C&D Past Due Loan Rate (Right Axis)

Percent Percent

Source: FDIC.

Note: Data as of fourth quarter 2020.

Chart 39
2021 Risk Review | 45

Nonbanks continued to increase their presence in the 

mortgage market. Among the top 50 mortgage lenders, 

nonbanks accounted for 74.4 percent of mortgage 

originations in fourth quarter 2020, up sharply from 

a 49.7 percent share in fourth quarter 2016. Similarly, 

among the top 50 mortgage servicers in fourth quarter 

2020, nonbanks serviced 51.3 percent of loans, up from 

37.9 percent in fourth quarter 2016.51 The shift in market 

share evolved as some banks exited mortgage servicing 

and origination on business decisions to limit exposure 

to the housing market after the 2007 housing crisis. 

Nonbanks have a competitive edge in mortgage 

origination and servicing over banks, particularly 

community banks, thanks to specialization and the use 

of technology to improve efficiency and profits and 

less comprehensive regulatory oversight relative to 

banks.52 The shift in mortgage activity away from banks, 

combined with a potential drag on sales growth from the 

low inventory of homes for sale, could be a headwind to 

1–4 family residential loan growth among banks in the 

coming year. 

51 Inside Mortgage Finance, “Inside Mortgage Finance,” September 22, 2017; February 2, 2018; January 29, 2021; and February 5, 2021. 

52 See Kayla Shoemaker, “Trends in Mortgage Origination and Servicing: Nonbanks in the Post-Crisis Period,” FDIC Quarterly 13, no. 4 (2019), https://www.fdic.gov/

bank/analytical/quarterly/2019-vol13-4/fdic-v13n4-3q2019-article3.pdf; and FDIC, Community Banking Study, December 2020, https://www.fdic.gov/resources/

community-banking/report/2020/2020-cbi-study-full.pdf. 53 Federal Reserve Bank of New York, “Household Debt and Credit Report, Q4 2020,” https://www.newyorkfed.org/microeconomics/hhdc.html. 54 CoreLogic, Homeowner Equity Insights Report, Fourth Quarter 2020.

Gauging mortgage loan performance remains 

challenging. One year after the start of the pandemic, 

federal programs continued to help many homeowners 

and insulate bank mortgage asset quality. The ability of 

homeowners to service their mortgages once support 

programs end will be a key factor in the outlook for asset 

quality. 

Data suggest that mortgage underwriting industry-wide 

has been more disciplined than in the last housing 

cycle. In fourth quarter 2020, more than 70 percent 

of all mortgages originated were to borrowers with 

credit scores of 760 or above, well above the 24 percent 

leading up to the previous downturn.53 In addition, only 

1.8 percent of mortgages originated in fourth quarter 

2020 were to borrowers with credit scores below 620, 

improved from the high of more than 15 percent leading 

into the Great Recession. The rise in home prices last year 

helped reduce the share of homes with negative equity 

to 2.8 percent in fourth quarter 2020, down from the 2009 

peak of 26 percent.54 With equity in their home, some 

challenged residential mortgage loan borrowers may 

choose to sell instead of defaulting on their mortgage. 
46 | 2021 Risk Review

Leveraged Lending and Corporate Debt

• Significant disruptions in corporate debt markets early in the 2020 pandemic were curtailed by Federal Reserve 

actions that helped to restore stability to bond and leveraged loan markets.

• Corporate debt was elevated before the pandemic and increased further as bond issuance surged, pushing 

corporate debt-to-GDP to record numbers.

• Continuing challenges from the pandemic and high levels of debt could cause corporate borrowers in 

vulnerable sectors to default on their debt obligations. 

• Banks remain exposed to risks in corporate debt markets both directly and indirectly.

55 ICE BofA High Yield Index option-adjusted spread and ICE BofA U.S. Corporate Index option-adjusted spread.

56 S&P Global Market Intelligence, Leveraged Commentary and Data, Interactive High-Yield Bond Report and Leveraged Loan Interactive Volume Report.

57 Board of Governors of the Federal Reserve System, Enhanced Financial Accounts.

58 S&P Global Market Intelligence, Leveraged Commentary and Data, Quarterly Leveraged Lending Review, Fourth Quarter 2020; and S&P Global Market Intelligence, 

Leveraged Commentary and Data, Leveraged Loan Interactive Volume Report.

Corporate debt markets experienced substantial 

turmoil in early 2020. The COVID-19 pandemic and 

ensuing economic downturn led to severe disruptions 

in corporate debt markets in the first half of 2020. 

Corporate bond spreads spiked sharply in March 2020, 

reaching their highest levels since the Great Recession 

(Chart 40).55 Leveraged loan prices collapsed in March, 

with distressed ratios increasing nearly six-fold from 

their level at the start of the year. Issuance of highyield bonds and leveraged loans used to finance riskier 

borrowers fell substantially.56 Amid higher borrowing 

costs in debt markets, corporations drew heavily on their 

lines of credit at banks and other financial institutions; 

drawn syndicated revolving credit facilities rose by 

almost 60 percent in first quarter 2020.57

Federal Reserve intervention mitigated corporate debt 

market stress. These market disruptions along with 

the escalating economic downturn in early 2020 led to 

the implementation of Federal Reserve programs that 

provided support to corporate debt markets. Following 

the introduction of these programs, corporate bond 

spreads tightened significantly. Corporate debt market 

issuance rose sharply as markets stabilized. Both 

high-yield and investment-grade bond issuance ended 

2020 about 60 percent above 2019 levels (Chart 41).58

Corporations used this new debt for a variety of 

purposes including to refinance existing bonds and 

loans and raise additional funds.

Corporate debt was already historically high and rose 

even higher during the pandemic. The 2020 disruptions 

to corporate debt markets and the ensuing rise in 

corporate borrowing following the Federal Reserve’s 

market stabilization efforts came after a decade of rising 

corporate debt levels. Before the pandemic, corporate 

debt as a share of GDP was already at an all-time high. 

The rapid drop in GDP in 2020 along with rising debt 

issuance pushed the corporate debt-to-GDP ratio even 

higher (Chart 42). As a share of pre-tax profit, corporate 

debt in second quarter 2020 reached its highest level 

since 2002 but quickly declined to pre-recession levels 

Banks are exposed to risks in corporate debt and leveraged lending though asset holdings and 

underwriting activities:

• In fourth quarter 2020, U.S. depository institutions held almost $1 trillion in syndicated loans.

• Bank holdings of collateralized loan obligation (CLO) securities backed by leveraged loans totaled at 

least $101 billion in fourth quarter 2020. 

• In 2020, banks earned over $11 billion in non-interest income from investment banking, underwriting, 

and advisory activities, which include underwriting corporate debt issuance and CLOs.
2021 Risk Review | 47

by third quarter 2020.59 Even before the pandemic, the 

FDIC and other regulators identified elevated corporate 

debt as a source of risk to the banking system and 

the broader economy.60 Higher debt levels can make 

businesses more vulnerable in the event of an increase 

in borrowing costs or a decline in profits, both of which 

occurred in 2020. Subsequently, corporate defaults 

reached the highest level since 2010.61

Risks in leveraged loan and corporate bond markets 

remain, though some risk measures have improved 

from previous years. Market participants estimate that 

default rates will remain elevated for corporate bonds 

and leveraged loans throughout 2021 and into 2022.62 In 

leveraged loan markets, measures of borrower leverage 

moderated slightly in 2020 on average but remain at 

high levels. Falling interest rates helped improve cash 

flow ratios (earnings relative to interest expenses) 

for leveraged loan borrowers, reversing two years of 

weakness. The share of leveraged loans lacking lenderprotecting covenants remained at an all-time high, 

representing more than 86 percent of newly issued 

institutional leveraged loans.63

59 Board of Governors of the Federal Reserve System, Financial Accounts of the United States; and Bureau of Economic Analysis GDP estimates.

60 FDIC, 2019 Risk Review, https://www.fdic.gov/analysis/risk-review/2019-risk-review.html.

61 S&P Global Market Intelligence, “U.S. Corporate Bankruptcies End 2020 at 10-Year High Amid COVID-19 Pandemic,” January 5, 2021, https://www.spglobal.com/

marketintelligence/en/news-insights/latest-news-headlines/us-corporate-bankruptcies-end-2020-at-10-year-high-amid-covid-19-pandemic-61973656.

62 Fitch Ratings, “Fitch U.S. High Yield Default Insight,” October 9, 2020, https://www.fitchratings.com/research/corporate-finance/fitch-us-high-yield-default-insighthy-default-rate-elevated-through-2022-poised-to-finish-at-5-5-in-2020-09-10-2020; and S&P Global Market Intelligence, “2021 Leveraged Loan Survey: Defaults Edge 

Higher; Credit Quality a Concern,” December 18, 2020, https://www.spglobal.com/marketintelligence/en/news-insights/blog/2021-leveraged-loan-survey-defaultsedge-higher-credit-quality-a-concern.

63 S&P Global Market Intelligence, Leveraged Commentary and Data, Quarterly Leveraged Lending Review, Fourth Quarter 2020.

For corporate bonds, low interest rates and stable 

markets following the Federal Reserve interventions 

have allowed corporations to reduce borrowing costs 

and push out maturities, providing more financial 

Corporate Bond Spread Spike Was Abrupt but Less Severe Than During the 

Great Recession and Has Since Reversed

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Recession

Investment Grade

High Yield

Corporate Bond Spread

Percent

Sources: ICE Data Indices, LLC, and ICE BofA (Federal Reserve Economic Data).

Note: Shaded areas indicate recessions.

Chart 40

Corporate Bond Issuance Reached Record Highs in 

2020, While Leveraged Loan Issuance Declined

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2012 2013 2014 2015 2016 2017 2018 2019 2020

Investment Grade High Yield Leveraged Loans

Issuance

$ Billions

Source: S&P Leveraged Commentary and Data.

Chart 41
48 | 2021 Risk Review

cushion. As of January 1, 2021, corporate debt maturing 

in 2021 declined relative to levels before the pandemic, 

with investment-grade maturities peaking in 2022 and 

high-yield maturities not peaking until 2025.64 However, 

firms in sectors most affected by the pandemic will 

likely continue to face difficulties into 2021 and could 

encounter further credit downgrades and bankruptcies, 

which have already increased substantially. Leveraged 

loan defaults rose substantially in 2020 but have 

declined since peaking in third quarter 2020 (Chart 43).

Banks remain exposed to corporate debt risks both 

directly and indirectly. Banks have exposure to 

corporate debt through several channels, including 

term and revolving syndicated lending facilities. Drawn 

syndicated loans from banks surged in the first quarter 

of 2020 as corporate borrowers drew on unfunded credit 

lines to shore up liquidity amid the uncertainty of the 

pandemic. While these drawn syndicated loans have 

since declined as borrowers repaid or refinanced them, 

banks still held almost $1 trillion in drawn syndicated 

loans as of fourth quarter 2020, more than triple the 

amount they held a decade earlier (Chart 44).65

64 S&P Global Ratings, “Credit Trends – Global Refinancing – Rated Corporate Debt Due Through 2025 Totals $11.3 Trillion,” February 8, 2021, https://www.spglobal.

com/ratings/en/research/articles/210208-credit-trends-global-refinancing-rated-corporate-debt-due-through-2025-totals-11-3-trillion-11828370. 65 Board of Governors of the Federal Reserve System, Enhanced Financial Accounts.

66 FDIC, Consolidated Reports of Condition and Income (Call Reports). Information is reported only for banks with at least $10 billion in assets and may include some 

assets other than CLO holdings. Due to the limited coverage of banks, it is likely an underestimate. The Call Report line items included in this measure are commercial 

and industrial loan asset-backed securities and structured financial products whose underlying collateral or reference assets are corporate and similar loans. These 

holdings include assets held to maturity, available for sale, and held in trading accounts.

Banks also face indirect exposure to leveraged loans 

through their holdings of CLOs. As of fourth quarter 

2020, bank CLO holdings totaled at least $101 billion.66

Bank CLO holdings are likely less risky than the 

leveraged loans they hold directly, as banks tend to 

Leveraged Loan Default Rates Rose in 2020 but Have 

Started to Fall and Remain Well Below Levels in Past 

Recessions

0

2

4

6

8

10

12

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2020

By Amount

By Issuer Count

Leveraged Loan Default Rate

Percent

Source: S&P Leveraged Commentary and Data.

Note: Default rates are lagging 12-month rates.

Chart 43

Corporate Debt Was Already at an All-Time High and Has Increased Further 

During the Pandemic

0

4

8

12

16

20

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Nonfinancial Corporate Debt-to-GDP (Left Axis)

Nonfinancial Corporate Debt-to-Profit (Right Axis)

Nonfinancial Corporate 

Debt-to-GDP Ratio

Nonfinancial Corporate

Debt-to-Profit Ratio

Sources: Federal Reserve and Bureau of Economic Analysis (Haver Analytics).

Note: Nonfinancial corporate debt includes loan and debt security liabilities. Nonfinancial corporate profit is 

before tax and includes inventory valuation adjustment at a seasonally adjusted annual rate.

Chart 42
2021 Risk Review | 49

predominantly hold higher-rated CLO tranches.67 Large 

banks also arrange most leveraged loan issuances and 

provide warehouse financing to new CLOs, which can 

put them at risk in times of disruption in leveraged loan 

markets as they could take losses on warehouse loans 

or be forced to retain underwritten leveraged loans on 

their balance sheets. The market turmoil in early 2020 

resulted in new issuance of leveraged loans drying up 

and secondary market loan prices plunging.68 However, 

the relatively quick rebound in leveraged loan and highyield bond issuance in the second half of 2020, amid 

Federal Reserve support for the higher-rated portions 

of corporate debt markets, likely limited the harm to 

arranging banks, as did the postponement of a large 

amount of planned leveraged loans.69 The risk remains 

that a more prolonged downturn in leveraged credit 

markets could result in losses to arranging banks and 

warehouse lenders. 

Banks also earn fees from arranging bond, leveraged 

loan, and CLO issuances. A significant and prolonged 

decline in issuance would result in less fee income for 

U.S. banks. Finally, macroeconomic disruptions from 

corporate debt disruptions due to businesses reducing 

employment and investment could have negative 

spillover effects to asset quality in other types of bank 

loans.

Banks are better positioned to withstand shocks than 

they were before the Great Recession, which may help 

67 Laurie DeMarco, Emily Liu, and Tim Schmidt-Eisenlohr, “Who Owns U.S. CLO Securities? An Update by Tranche,” Board of Governors of the Federal Reserve System, 

FEDS Notes, June 25, 2020, https://www.federalreserve.gov/econres/notes/feds-notes/who-owns-us-clo-securities-an-update-by-tranche-20200625.htm. 68 S&P Global Market Intelligence, Leveraged Commentary and Data, Leveraged Loan Interactive Volume Report; and Tyler Udland, “Quick Take – After Recent Surge, 

U.S. Leveraged Loan Prices Reach Pre-Pandemic Levels,” S&P Global Market Intelligence, January 14, 2021, https://www.spglobal.com/marketintelligence/en/newsinsights/latest-news-headlines/after-recent-surge-us-leveraged-loan-prices-reach-pre-pandemic-levels-62105868. 69 S&P Global Market Intelligence, “From Crisis to Crisis – March 2020 U.S. Leveraged Loan Market Rivals 2008,” April 3, 2020, https://www.spglobal.com/

marketintelligence/en/news-insights/latest-news-headlines/from-crisis-to-crisis-8211-march-2020-us-leveraged-loan-market-rivals-2008-57882776; and S&P 

Global Market Intelligence, Leveraged Commentary and Data, “LCD Quarterly Review,” Fourth Quarter 2020, https://www.lcdcomps.com/lcd/download/15021/LCD_

Quarterly_2020Q4.pptx?rid=910&method=downloadResearchFile.

them manage potential strains in the corporate debt 

market. Bank capital levels are substantially higher 

than they were before the Great Recession, and their 

reliance on short-term wholesale funding has fallen as 

the use of deposit funding has risen. Banks with high 

concentrations of corporate debt exposure could face 

strains in the event of further corporate debt distress. In 

particular, banks with concentrations in loans to firms 

in especially hard-hit industries such as energy and 

hospitality could face elevated credit losses as those 

firms struggle to recover from the pandemic.

Syndicated Loans Held by Banks Have Fallen Since 

Spiking in Early 2020, but Remain Well Above Levels 

From Past Years

0

200

400

600

800

1,000

1,200

1,400

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Syndicated Loans Held by Banks

$ Billions

Source: Federal Reserve Board Enhanced Financial Accounts (Haver Analytics).

Chart 44
50 | 2021 Risk Review

Nonbank Financial Institution Lending

• Loans to nonbank financial institutions increased in 2020.

• Nonbank financial institutions relied on bank lending amid uncertainty at the onset of the pandemic. 

• The growth in banking sector exposure to nonbank financial institutions in 2020 increased the industry’s 

vulnerability to risks from nonbank lending activities.

70 Nonbank financial institutions include mortgage lenders and other nonbanks that do not primarily make loans, including private equity funds, real estate investment 

trusts, hedge funds, insurance companies, and venture capital funds.

71 Sergey Chernenko, Isil Erel, and Robert Prilmeier, “Why Do Firms Borrow Directly From Nonbanks?” (Working Paper, no. 26458, National Bureau of Economic 

Research, November 2019, Revised August 2020), https://www.nber.org/papers/w26458. 

Banks were an important source of funding for 

nonbank financial institutions at the onset of 

the pandemic. Bank lending to nonbank financial 

institutions as a percentage of total loans has increased 

steadily since 2010, reaching $579 billion at year-end 

2020 (Chart 45).70 The year-over-year growth rate 

for nonbank financial institution lending outpaced 

growth in most other loan portfolios in 2020, surging 

38 percent in the first quarter (Chart 46). Like many 

other businesses, nonbank financial institutions drew 

down their existing lines at banks amid uncertainty at 

the onset of the pandemic, which contributed to strong 

loan growth. The pace of growth slowed during the rest 

of 2020 but continued to exceed the growth rate in most 

other loan categories.

Most of the lending to nonbank financial institutions 

occurs at the largest banks. Global systemically 

important banks held 58 percent of all loans outstanding 

to nonbank financial institutions as of fourth quarter 

2020. Community banks accounted for 3 percent 

of all loans to nonbank financial institutions. While 

community bank balances of nonbank financial 

institution lending dropped in the first half of 2020, 

balances rebounded in the second half of the year, 

exceeding pre-pandemic levels. 

Community banks tend to lend to nonbank mortgage 

originators. Most lending to nonbank financial 

institutions by community banks is typically through 

warehouse lines of credit to nonbank mortgage lenders. 

While warehouse lines were a significant source of 

loss to banks during the Great Recession, mortgage 

origination and servicing is relatively low risk because 

of frequent monitoring and significant collateralization. 

The nonbank mortgage origination business increased 

substantially in the past year in tandem with significant 

mortgage refinancing activity and could explain the 

recent rebound in nonbank lending balances. 

Banks that lend to nonbanks also are exposed to 

indirect risks. Some nonbanks are highly leveraged, 

and their portfolios are relatively unseasoned and 

untested. While recent government support reduced 

the risk of adverse events challenging the nonbank 

sector, funding risks could arise when government 

support is withdrawn. Some research indicates that 

some nonbanks hold riskier loans than banks.71 For 

example, these nonbanks are less likely to require or 

monitor for financial covenants on their loans, charge 

interest rates that may not reflect all of the risk, and lend 

to less profitable, more leveraged borrowers. Further, 

some nonbanks have exposure to historically risky 

loan categories, such as commercial real estate. This 

additional indirect exposure may pose risks to banks 

Loans to nonbank financial institutions held by FDIC-insured institutions totaled $579 billion in fourth 

quarter 2020.

• Global systemically important banks hold about 58 percent of all loans outstanding to nonbank 

financial institutions.

• Community banks hold 3 percent ($19 billion) of total loans to nonbank financial institutions.
2021 Risk Review | 51

if not fully reflected in their portfolio concentration 

monitoring or other risk management tools.

Banks were an important source of funding for 

nonbank financial institutions in 2020. Because of the 

direct and indirect risks inherent in these loans, lending 

to nonbank financial institutions requires prudent 

monitoring and underwriting. As nonbank financial 

institution balances continue to grow, banks may be 

increasingly exposed to the direct and indirect risks 

posed by nonbank financial institutions. 

Bank Lending to Nonbank Financial Institutions Surged at the Onset of the 

Pandemic

0

2

4

6

8

10

12

14

0

50

100

150

200

250

300

350

400

450

500

550

600

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Community Bank Loans to Nonbanks (Le Axis)

Noncommunity Bank Loans (Excluding GSIBs) to Nonbanks (Le Axis)

GSIB Loans to Nonbanks (Le Axis)

Percent Share of Banks With Loans to Nonbanks (Right Axis)

Loans toNonbank Financial Institutions

$ Billions

Share of Banks With Loans to Nonbanks

Percent

Source: FDIC.

Note: Quarterly data through fourth quarter 2020. GSIBs are global systemically important banks and are 

introduced in fourth quarter 2011.

Chart 45

Growth in Lending to Nonbank Financial Institutions in 2020 Outpaced 

Growth in Most Major Loan Categories

18

38

18

15

18

-5

0

5

10

15

20

25

30

35

40

Q3 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020

Agriculture

Consumer

Commercial Real Estate

1–4 Family

Commercial and Industrial

Loans to Nonbank Financial Institutions

Annual Loan Growth

Percent

Source: FDIC.

Chart 46
52 | 2021 Risk Review

Small Business Lending

• Small business conditions weakened significantly at the onset of the pandemic as stay-at-home orders and 

changing consumer behavior reduced business activity.

• Small business lending increased in 2020, primarily because of government programs such as the PPP. 

• Small business closures and bankruptcies did not translate into credit deterioration in 2020. 

• While asset quality remained at manageable levels at year-end 2020, the long-term effect of the pandemic on 

small business asset quality is uncertain and remains an important source of credit risk for banks.

Small business lending is a key component of many bank lending portfolios, regardless of location. 

• Banks with total small business loans greater than 75 percent of total C&I loans comprise approximately 

44 percent of total FDIC-insured institutions. 

Regional Exposure to Small Business Lending

Dots on map represent banks where small business loans are greater than 75 percent of C&I loans. 

Source: FDIC.

Note: U.S. territories are not included in the map; one bank in Guam with a concentration of small business loans is not shown.
2021 Risk Review | 53

The deterioration in small business conditions during 

the pandemic differed from previous recessions. Stayat-home orders, mandated temporary business closures, 

and reduced consumer spending on nonessential 

goods and services during the pandemic caused many 

small businesses to shutter or change their business 

strategy. Consumers reduced their spending, which 

also reduced small business activity. In contrast, most 

small businesses in previous recessions continued 

to operate despite slower sales, and businesses that 

closed had weaker business models or more exposure 

to the industries hit hardest by the recession. In short, 

the pandemic weakened large swaths of businesses 

more broadly and abruptly. Distress from the pandemicinduced closures has persisted even as broader 

economic growth has improved. 

Banks played a key role in funding small businesses 

throughout 2020, often in conjunction with federal 

programs such as the PPP. Outside of the PPP, demand 

for business loans fell and underwriting standards 

tightened. While asset quality remained at manageable 

72 Yelp Economic Average, Third Quarter 2020 Report, October 2020, https://www.yelpeconomicaverage.com/yea-q3-2020.html. 73 Bureau of Economic Analysis, Table 2.3.5U: Personal Consumption Expenditures by Major Type of Product and by Major Function, Fourth Quarter 2020, https://apps.

bea.gov/iTable/iTable.cfm?reqid=19&step=3&isuri=1&select_all_years=0&nipa_table_list=2014&series=m&first_year=2020&last_year=2021&scale=-99&categorie

s=underlying&thetable. 

levels at year-end 2020, the long-term effect of the 

pandemic on small business asset quality is uncertain. 

Stay-at-home orders had various effects on small 

businesses. Stay-at-home orders were instituted in many 

cities, counties, and states at the onset of the pandemic 

(Map 2). These orders caused many small businesses to 

limit capacity, shift business models, lay off employees, 

or close. Many initial orders were lifted throughout the 

spring and summer of 2020, allowing businesses to 

reopen and rehire employees. New businesses opened, 

including restaurants that offered more outside seating 

and order-ahead menus, as well as food trucks and food 

vendors at farmers’ markets.72 These openings increased 

in mid- to late-2020 and were on track with monthly 

openings in 2019. While a resurgence of COVID-19 

occurred in late 2020, most states did not reinstate strict 

stay-at-home orders (Map 3). 

The decline in consumer spending shows the effect of 

stay-at-home orders on individuals and businesses. 

Personal consumption expenditures (PCE) declined 

sharply when the pandemic began.73 Second quarter 

Map 2

Stay-At-Home Orders Were Widespread in 

April 2020

Source: Centers for Disease Control and Prevention.

CDC, COVID-19 Community Intervention and At-Risk Task Force, Monitoring 

and Evaluation Team & CDC, Center for State, Tribal, Local and Territorial 

Support, Public Health Law Program, “State Territorial, and Country 

COVID-19 Orders and Proclamations for Individuals to Stay Home,” (July 7, 

2020). Accessed from: https://ephtracking.cdc.gov/DataExplorer. Accessed 

on 02/08/2021.

Map 3

Stay-At-Home Orders Almost Disappeared by 

December 2020

Source: Centers for Disease Control and Prevention. 

CDC, COVID-19 Community Intervention and At-Risk Task Force, Monitoring 

and Evaluation Team & CDC, Center for State, Tribal, Local and Territorial 

Support, Public Health Law Program, “State Territorial, and Country 

COVID-19 Orders and Proclamations for Individuals to Stay Home,” (July 7, 

2020). Accessed from: https://ephtracking.cdc.gov/DataExplorer. Accessed 

on 02/08/2021.
54 | 2021 Risk Review

2020 PCE dropped almost 10 percent from a year earlier 

and more than 11 percent from the fourth quarter 2019 

high. While PCE rebounded in fourth quarter 2020, it 

remained below the level of a year earlier (Chart 47). PCE 

categories that saw the biggest year-over-year declines 

in fourth quarter 2020 were recreation, transportation, 

and food services and accommodations. While these 

categories improved quarter over quarter, levels remain 

well below those of a year earlier. Conversely, several 

PCE categories reported a year-over-year increase, 

reflecting the effect of stay-at-home orders on consumer 

behavior. Motor vehicles and parts, furnishings and 

durable household goods, and recreational goods 

saw double-digit growth between fourth quarter 2019 

and fourth quarter 2020. These changes in consumer 

spending all translate to the health and viability of small 

businesses. 

Business closures and bankruptcies vary by business 

type and size. Business closures have risen dramatically 

since the start of the pandemic. As of August 31, 2020, 

more than 163,000 businesses listed on Yelp closed 

and approximately 98,000 closed permanently, a rate 

of 1.96 percent based on the 4.9 million active business 

listings on Yelp.74 According to data from Womply, open 

74 Yelp, Local Economic Impact Report, September 2020, https://www.yelpeconomicaverage.com/business-closures-update-sep-2020.html; and Yelp Inc., 2019 

Annual Report, http://d18rn0p25nwr6d.cloudfront.net/CIK-0001345016/360caaf2-1804-462c-a5db-460952da09e2.pdf. 75 Womply is a data platform that provides business solutions such as marketing, website development, and customer management to small businesses. As of March 

17, 2021, Womply reported that more than 500,000 small businesses in 14 main industry categories use their various technology and data solutions. 

76 Moody’s Investor Service, “Gaming, Lodging, Cruising, and Restaurants – U.S: Outlook 2021,” December 14, 2020, and “Retail and Apparel – U.S.: Outlook 2021,” 

December 3, 2020. 

77 American Bankruptcy Institute, Commercial Bankruptcy Filings, All Chapters, January 2021, https://www.abi.org/newsroom/bankruptcy-statistics. 

businesses declined approximately 29 percent between 

January 2020 and December 2020.75

The effect of the pandemic on small businesses also 

varied by business type. Hospitality, retail, and food 

services were hurt more than other small businesses 

such as law offices and real estate agencies. Restaurants 

closed at a rate of 55 businesses per 1,000, and almost 

20,000 closed permanently. Restaurants and retail 

are expected to continue to be among the hardest hit 

businesses in 2021 with outlooks that show a slow 

recovery but a return to pre-pandemic levels.76

Despite the adverse effects of stay-at-home orders, 

declining consumer spending, and permanent business 

closings in 2020, the number of commercial bankruptcy 

filings was slightly below prior-year levels.77 Total 

Chapter 7 and Chapter 11 bankruptcy filings in 2020 

declined 7.1 percent from 2019 and 10.2 percent since 

the onset of the pandemic (Table 1). A divergence 

occurs when comparing Chapter 11 bankruptcy filings, 

reorganizations, to Chapter 7 bankruptcy filings, 

liquidations. While reorganization bankruptcies 

increased 33.1 percent since the pandemic, liquidation 

filings declined 20.1 percent. Small businesses, which 

Consumer Spending Shifted From Services to Durable Goods During Stay-atHome Orders 

0

100

200

300

400

500

600

700

800

900

1,000

1,100

2Q2018 4Q2018 2Q2019 4Q2019 2Q2020 4Q2020

 Mo tor Vehicles and Parts

 Furnishings and Durable Household Equipment

 Recrea tional Goods and Vehicles

 Transportation Services

 Recrea tion Services

 Fo od Services and Accommodations

Durable Goods vs. Services Expenditures, 2018–2020

$ Billions

Source: Bureau of Economic Analysis.

Chart 47
2021 Risk Review | 55

tend to file Chapter 7 rather than Chapter 11, have 

benefited from various federal programs, while large 

corporations continue to use the bankruptcy system.78

The counterintuitive trend of an overall decline in small 

business bankruptcy filings during the pandemic reflects 

federal aid to businesses through the PPP and other 

SBA lending programs, access to credit through various 

Federal Reserve lending facilities, and other measures to 

ease the financial strain on businesses and consumers. 

While bankruptcy and closing activities may have been 

limited by federal programs, the expiration of those 

programs may spur additional bankruptcy filings and 

small business closures in 2021.

Small business lending increased in 2020, largely 

because of programs established by the CARES Act.

The PPP was established in March 2020 under the 

CARES Act to provide small businesses with funds to 

keep employees on the payroll despite disruptions in 

business. Banks were the primary lenders, providing 

more than $492 billion in PPP loans to small businesses. 

Community banks provided $151 billion, or more than 

31 percent of bank-funded PPP loans.79 Excluding these 

loans, industry C&I loan balances declined 7.9 percent 

year over year and total loans declined 0.6 percent 

(Chart 48). The decline in non-PPP C&I loans reflects 

tightening lending standards and lack of demand by 

businesses in an uncertain economy.80

78 Jialan Wang, Jeyul Yang, Benjamin Charles Iverson, and Raymond Kluender, “Bankruptcy and the COVID-19 Crisis,” (Working Paper, no. 21-041, Harvard Business 

School, September 10, 2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3690398. 79 Margaret Hanrahan and Angela Hinton, “The Importance of Community Banks in Paycheck Protection Program Lending,” FDIC Quarterly 14, no. 4 (December 2020), 

https://www.fdic.gov/bank/analytical/quarterly/2020-vol14-4/article1.pdf. 80 Board of Governors of the Federal Reserve System, Senior Lending Officer Opinion Survey on Bank Lending Practices, February 1, 2021, https://www.federalreserve.

gov/data/sloos/sloos-202101.htm. 

Respondents to the Federal Reserve’s January 2021 

Senior Loan Officer Opinion Survey indicated that 

underwriting standards for C&I lending tightened 

except for firms with annual sales of $50 million or 

more. Reasons for the tightening include an uncertain 

economic forecast, worsening of problems in some 

industries (such as in hotel, restaurant, and retail 

industries), increased concerns about the effects of 

legislative actions, and decreased liquidity in the 

secondary market for these loans. Respondents 

Paycheck Protection Program Loans Drove Loan 

Growth in 2020

-10

-5

0

5

10

15

Commercial and Industrial Loans Total Loans

Including PPP Loans Excluding PPP Loans

Annual Loan Growth Rates, 2019–2020

Percent

Source: FDIC.

Chart 48

Commercial Bankruptcy Filings Varied by Type During the Pandemic

Type of 

Bankruptcy Filing 

(Commercial 

Only)

2019 

Filings 

(Number)

 2020 

Filings 

(Number)

YearOver-Year 

Change 

(Percent)

March–

December 

2019 Filings 

(Number)

March–

December 

2020 Filings 

(Number)

Change Between 

Mar–Dec 2019 and 

Mar–Dec 2020 

(Percent)

Chapter 7 Filings 22,834 19,220 (15.8) 19,492 15,565 (20.1)

Chapter 11 Filings 5,519 7,128 29.2 4,468 5,949 33.1 

Total Filings 28,353 26,348 (7.1) 23,960 21,514 (10.2)

Source: American Bankruptcy Institute.

Table 1
56 | 2021 Risk Review

indicated that they saw weaker demand for C&I loans, 

including a decline in customer loan inquiries. The 

decline appears to reflect lack of demand for inventory 

financing, asset-based financing, equipment purchase 

financing, and merger and acquisition financing. 

Respondents also indicated that deterioration in loan 

performance is anticipated, except for firms with annual 

sales of $50 million or more. 

Despite business closures and changes in consumer 

spending and saving, banks did not report a 

substantial increase in nonperforming loans in fourth 

quarter 2020. The banking industry reported modest 

credit deterioration, as the noncurrent rate rose only 

27 basis points to 1.18 percent between fourth quarter 

2019 and fourth quarter 2020. The C&I noncurrent loan 

rate rose 20 basis points to 0.99 percent. These rates may 

be muted, however, because of strong C&I loan growth 

from PPP loan originations.81

When excluding PPP loans, the C&I noncurrent rate 

increases another 20 basis points to 1.19 percent 

(Chart 49). The C&I noncurrent rate at community 

banks declined 23 basis points to 0.66 percent from 

fourth quarter 2019. Again, this rate is affected by PPP 

loan originations. Excluding PPP loans, the community 

81 PPP loans are guaranteed fully by the SBA and pose no risk to insured depository institutions as demonstrated with the zero percent weight given for risk-based 

capital calculations. 

82 William C. Dunkelberg and Holly Wade, “NFIB Small Business Economic Trends,” National Federation of Independent Businesses, December 2020.

bank noncurrent C&I loan rate rises 37 basis points to 

1.03 percent. 

The outlook for small business lending in 2021 is 

unclear. The second round of PPP approved by Congress 

in late December 2020 provides an additional $284 

billion for small businesses. This new round of funding 

changes requirements for firms requesting a second PPP 

loan, such as reducing the number of employees needed 

to qualify as a small business, requiring businesses to 

show a 25 percent decline in business receipts between 

comparable quarters in 2019 and 2020, increasing the 

range of purposes for the loan proceeds, and easing 

forgiveness applications for loans less than $150,000. 

While these changes are designed to provide more 

funding to small businesses, demand for small business 

loans may remain low. The National Federation of 

Independent Businesses’ (NFIB) December 2020 survey 

showed that 60 percent of respondents “were not 

interested in a loan.”82 Moreover, while the Federal 

Reserve Board’s January 2021 Beige Book indicates that 

bankers anticipate an increase in loan demand owing to 

PPP and other government-backed lending programs, 

the resurgence of the virus, including new strains, has 

tempered that optimism. Some districts indicated a drop 

Paycheck Protection Program Loans Are Muting Noncurrent Loan Rates 

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4 Industry

Community Banks

Noncurrent Rates, Q4 2020

Percent

Noncurrent C&I 

Loan Rate

Noncurrent C&I Rate

Excluding PPP Loans

Noncurrent Loan 

Rate

Noncurrent Loan Rate

Excluding PPP Loans

Source: FDIC.

Note: C&I is commercial and industrial.

Chart 49
2021 Risk Review | 57

in loan demand and a tightening of C&I underwriting 

standards. Some districts also are concerned that a rise 

in delinquencies will result from forbearance roll-offs, 

although this increase has not been seen in the past.83

The recovery for small businesses remains uneven but is 

on par with previous recessions. According to the NFIB 

survey, some businesses are hiring or making capital 

expenditures, but few are seeing an increase in sales. 

Business owners do not expect business conditions to 

improve in the next six months. In addition, the NFIB 

Optimism Index fell to 95.9 in December, down 5.5 

points from November but up slightly from the April 

2020 low of 90.9. While the index has not returned to 

83 The Federal Reserve’s Beige Book reports on regional economic conditions and prospects in the 12 Federal Reserve Districts based on mostly qualitative information 

gathered from District banks and other sources, including businesses, economists, and market experts. See Board of Governors of the Federal Reserve System, 

The Beige Book: Summary of Commentary on Current Economic Conditions by Federal Reserve District, January 13, 2021, https://www.federalreserve.gov/

monetarypolicy/files/BeigeBook_20210113.pdf. 84 NFIB’s Optimism Index measures the “mood” of small businesses that respond to its monthly survey that covers ten components: employment, capital outlays, 

inventory increases, economic improvement, higher sales, current inventory levels, current job openings, expected credit conditions, expansion, and earnings trends. 

A value greater than 100 indicates that business owners are optimistic about the future; a value less than 100 indicates that business owners are pessimistic about the 

future. 

85 NFIB Optimism Index data using Great Recession dates of December 2007 through June 2009. 

its pre-pandemic level of 104 reported in February 

2020, recovery is on par with previous downturns.84 The 

NFIB Optimism Index took 20 months to rebound to its 

November 2007 level after the Great Recession.85

Areas of concern related to small business lending could 

be exacerbated if economic conditions do not improve 

as quickly or as much as expected in 2021. Although 

distribution of the COVID-19 vaccines has begun, small 

businesses may wait to see how the recovery progresses 

and whether consumers return to pre-pandemic 

spending patterns before they rehire employees or 

borrow funds.
58 | 2021 Risk Review

MARKET RISK

Interest Rate Risk and Net Interest Margin

• The low interest rate environment challenged banking sector profitability in 2020 as net interest margins 

(NIMs) narrowed to a record low. 

• The large increase in deposits coupled with decreased loan demand in 2020 pose interest rate risk challenges 

for banks. 

• Community bank net interest income as a percentage of net operating revenue weakened last year during a 

period of low interest rates and tepid loan demand. 

Aggregate NIMs for both community and noncommunity banks narrowed significantly in 2020.

• The NIM for community banks compressed to 3.39 percent, a decline of 27 basis points from 2019 and a 

historical low. 

• The NIM for noncommunity banks narrowed to 2.75 percent, a decline of 57 basis points from 2019 and a 

historical low.

• Banks reporting NIM compression higher than that of 80 percent of the banking industry were primarily 

smaller community banks, with an average NIM compression of 37 basis points.

Banks With NIM Compression Above the 80th Percentile 

Dots on map show the distribution of banks with average year-over-year NIM compression of 37 basis points, which ranked in the 80th 

percentile or higher. 

Source: FDIC.
2021 Risk Review | 59

The low interest rate environment challenged the 

banking sector in 2020 as net interest margins 

narrowed to record lows. Both short-term and 

longer-term interest rates declined considerably in 

2020. The effective federal funds rate fell by more 

than 150 basis points during the first two quarters of 

2020, while broader market interest rates experienced 

similar declines to historic lows (Chart 50). Specifically, 

the 5-year Constant Maturity Treasury (CMT) yield 

dropped from 1.67 percent at the beginning of 2020 to 

0.36 percent as of year-end 2020. The 10-year CMT yield 

dropped from 1.88 percent to 0.93 percent during the 

same period. 

Lower interest rates in 2020 contributed to a decline 

in the industry NIM to a record low for the year. The 

reduction in NIM was broad-based, affecting banks of 

all asset sizes (Chart 51). The vast majority of banks that 

reported the highest levels of NIM compression—ranking 

in the 80th percentile for all institutions—were smaller 

banks, those with less than $1 billion in total assets. 

The extent to which the banking industry can reduce 

funding costs further to help protect against additional 

NIM compression remains uncertain. During the second 

half of 2020, longer-term interest rates improved and 

the yield curve steepened slightly, which typically have 

supported improvement in net interest margins. 

Although lower interest rates resulted in severe NIM 

compression, some banks benefited from increased 

mortgage loan refinancing activity spurred by the 

drop in mortgage rates. Higher mortgage refinancing 

activity boosted noninterest income from mortgage 

banking activities, offsetting a reduction in mortgage 

servicing fees that was likely due to higher impairment 

in mortgage servicing assets. Lower levels of mediumand long-term interest rates last year also contributed 

to the sale of higher-yielding 1–4 family mortgages 

at a premium by banks. As a result of these gains on 

sale, noninterest income to net operating revenue (net 

interest income plus noninterest income) increased 

2.1 percent in 2020 for the industry.

A slowdown in lending and new loans priced at lower 

interest rates further pressured income, but higher 

fee income helped mitigate the decline. Low-yielding 

PPP loans led total loan growth in 2020. Banks held 

$407.4 billion in PPP loans at year-end 2020, of which 

community banks held $114.7 billion or 28 percent. 

Although PPP loans carry a low interest rate of 1 percent, 

lenders also receive an origination fee of up to 5 percent 

based upon the loan amount. Total interest and fee 

income from PPP loans provided support to net interest 

income for the banking industry last year as demand for 

other loan types was anemic.

Fee income from PPP loans bolstered earnings for many 

banks late last year. Banks with a large proportion of 

PPP loans to total loans (10 percent or greater) reported 

a notable increase in interest income. During fourth 

Interest Rates Across the Maturity Spectrum Fell Sharply in First Quarter 

2020

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-1 Nov-20 Dec-20

3-Month CMT 5-Year CMT

10-Year CMT 10 Year Minus 2 Year Spread

Rate

Percent

Spread

Percent

Source: Federal Reserve.

Note: Spread refers to the difference between the 10-year Constant Maturity Treasury (CMT) yield and the 2-year 

CMT. 

Chart 50
60 | 2021 Risk Review

quarter 2020, PPP loan balances declined $83 billion 

(17.1 percent) as some PPP loans were forgiven. The fee 

income that was generated more than offset the loss of 

the low-yielding repaid PPP loans. 

The large increase in deposits coupled with decreased 

loan demand pose interest rate risk challenges for 

banks. The pandemic-induced savings behavior among 

businesses and consumers, a drawdown of available 

credit facilities by corporate borrowers during a period 

of financial market uncertainty, and government 

assistance programs all contributed to a large influx of 

bank deposits primarily in the first half of 2020. Slightly 

more than half of the deposit growth in 2020 (55 percent) 

was in interest-bearing accounts, such as money market 

demand accounts and time deposits. These liabilities, 

which increased $1.8 trillion (16.1 percent) from 2019, 

may become more costly and subject to withdrawal 

at maturity if interest rates rise and depositors have 

more options to pursue higher-yielding investment 

opportunities. 

Nonmaturity deposits rose 16.7 percent in 2020 from 

2019 levels. Because depositors can withdraw these 

funds at will, bank expectations related to the stability 

of these deposits will be crucial to effective interest rate 

risk management. If withdrawn, bank management 

may have to turn to more costly funding sources, which 

would place additional pressure on net interest income. 

Deposit growth greatly exceeded loan demand in 2020. 

The ratio of loans to assets declined across community 

and noncommunity banks last year. The net loans 

and leases to assets ratio for community banks fell 

4.5 percentage points year over year to 66.3 percent. 

The same ratio for noncommunity banks fell more than 

twice the community bank rate (10.6 percentage points) 

to 43.2 percent during the same period and was a record 

low (Chart 52). 

Reduced loan demand and a lack of higher-yielding 

investment options contributed to a shift in the maturity 

structure of the industry’s securities portfolio in 2020. 

The ratio of securities with contractual maturities of 

three years or greater reached its highest level in nearly 

20 years at 17.1 percent of total assets last year, up 

nearly 2 percentage points from 2019. This maturity 

extension likely reflected the desire by banks to gain 

some extra yield on investments during a period of 

reduced loan demand. Conversely, the ratio of mediumto long-term loans (those with maturities of three years 

or greater) declined from 20.7 percent to 18.4 percent 

year over year. 

Community bank net interest income as a percentage 

of net operating revenue weakened last year during 

a period of low interest rates and tepid loan demand. 

During 2020, net interest income as a percentage of 

net operating revenue for community banks declined 

from 79.6 percent to 75.6 percent, a 30-year low. This 

decline was driven primarily by an increase in relatively 

low-yielding earning assets—PPP loans and securities. 

This trend reflects differences between traditional 

business models of community and noncommunity 

Net Loans and Leases to Total Assets Declined in 

2020 for Community and Noncommunity Banks

0

10

20

30

40

50

60

70

80

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Community Banks Noncommunity Banks

Net Loans and Leases to Total Assets

Percent

Source: FDIC.

Chart 52

Net Interest Margin Compression Is Broad Based 

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Assets > $250 Billion

Assets $10 Billion - $250 Billion

Assets $1 Billion - $10 Billion

Assets $100 Million - $1 Billion

Assets < $100 Million

Net Interest Margin by Bank Asset Size

Percent

2020

Source: FDIC.

Chart 51
2021 Risk Review | 61

banks. A larger proportion of loans to assets and a 

greater volume of higher-yielding commercial real 

estate loans to total loans support community bank 

NIMs during periods of low interest rates but may limit 

community bank options to maintain profitability during 

a prolonged period of low interest rates and tepid loan 

demand. 

In addition, community banks have a less sensitive 

funding cost structure—one that reacts more slowly to 

sharp reductions in market rates—which limits their 

ability to reduce average funding costs as quickly as 

their noncommunity bank counterparts in a declining 

rate environment (Chart 53). A greater proportion of 

time deposits held by community banks contributes to 

this disparity. Time deposits represented 17.5 percent 

of community bank assets as of fourth quarter 2020 

compared with 5.6 percent for noncommunity banks. 

86 Federal Open Market Committee, Summary of Economic Projections, December 2020.

Because time deposits have fixed terms and generally 

bear fixed interest rates, they do not reprice as quickly as 

nonmaturity deposits. This benefits community banks 

in a period of rising interest rates but has the opposite 

effect when market rates decline, as occurred last year.

Community banks responded to the low interest rate 

environment by reducing funding costs. A decline in the 

use of typically more costly wholesale funding in favor 

of lower-cost core deposits supported reduced funding 

costs by community banks overall last year. However, 

funding costs approached historical lows, thus limiting 

the potential for community banks to drop deposit costs 

further. With expectations for continued low interest 

rates for the near term, the banking industry, and 

community banks in particular, may continue to face a 

challenging interest rate environment.86

Community Bank Funding Costs Are Less Sensitive to Interest Rate Changes 

Than Those of Noncommunity Banks

0

1

2

3

4

5

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Community Banks (Le Axis)

Noncommunity Banks (Le Axis)

Fed Funds Rate (Right Axis)

Average Cost of Funding Earning Assets

Percent

Fed Funds Rate

Percent

Sources: FDIC and Federal Reserve.

Note: Data from December 2008 through December 2020.

Chart 53
62 | 2021 Risk Review

Liquidity and Deposits

• Deposits surged during the pandemic as consumers and businesses responded to uncertainty by stockpiling 

cash. This caused a significant increase in banking sector liquidity.

• Federal programs created to mitigate economic stress, particularly the CARES Act, also contributed to deposit 

growth.

• Community bank reliance on wholesale funding decreased as on-balance sheet liquidity improved.87

• Weak loan growth in 2020 contributed to improved liquidity among community banks. 

87 Wholesale funding includes federal funds purchased and securities sold under agreement to repurchase; Federal Home Loan Bank borrowings; brokered and listing 

service, municipal and state, and foreign deposits; and other borrowings. Providers of wholesale funding closely track institutions’ financial condition and may cease or 

change access to wholesale funds if they determine a financial institution’s condition is deteriorating. 

Liquidity represents a financial institution’s ability to fund assets and meet obligations as they become 

due. Maintaining adequate liquidity is an essential part of banking. Liquidity is required to fulfill depositor 

withdrawals, make advances on existing lines of credit, and fund new loans. Financial institutions meet 

these demands by maintaining sufficient levels of cash, liquid assets, and prospective borrowing lines 

based on anticipated liquidity demands.

Liquidity improved across the industry in 2020, and community banks reported higher liquidity levels than 

noncommunity banks. 

• Community banks’ median short-term liquid assets to total assets ratio was 15 percent as of year-end 

2020 compared to 11 percent at noncommunity banks with assets under $100 billion. 

• Year over year, 961 community banks more than doubled their short-term liquid asset ratios in 2020. 

Among these institutions, more than one-third reported year-end ratios of 20 percent or more.

• Deposits are the primary source of funding for most community banks. 

Community Banks More Than Doubled Short-Term Liquid Assets 

Dots indicate community banks that reported short-term liquid asset ratios two or more times higher than the prior year as of December 31, 2020.

Source: FDIC.

Note: U.S. territories are not included in the map; one bank in Guam that meets the definition of increased short-term liquid assets is not shown.
2021 Risk Review | 63

Deposits surged during the pandemic as consumers 

and businesses responded to uncertainty by 

stockpiling cash. Coinciding with the economic 

uncertainty caused by the pandemic, many banks 

experienced an unprecedented influx of deposits. 

In aggregate, bank deposits grew by $3.3 trillion, or 

22.6 percent, in 2020. Although the largest banks (those 

with total assets exceeding $100 billion) captured the 

majority of deposit growth, deposits held at community 

banks also grew substantially, rising nearly 16 percent 

from $1.8 trillion to more than $2.1 trillion in 2020 

(Chart 54). Deposit growth was significant in 2020 

compared to the last five years. Between 2014 and 2019, 

the annual growth rate for community bank deposits 

reported annual deposit growth between negative 

1 percent and 3.3 percent.

Numerous factors contributed to the increase in 

community bank deposits. For example, when a national 

state of emergency was first announced in March 2020, 

there was an observable flight to cash and security by 

consumers and businesses. Many consumers decreased 

spending and increased savings as a result of canceled 

vacations, dining out less because of social distancing 

restrictions, and reduced transportation expenses 

associated with working and learning from home. In 

addition, some large corporations drew on existing lines 

of credit and stockpiled cash in deposit accounts as a 

contingency measure.

Federal programs created to mitigate economic stress, 

particularly the CARES Act, also contributed to deposit 

growth. Government assistance provided individuals 

with stimulus checks and increased unemployment 

benefits. It also provided thousands of small businesses 

access to billions of dollars in potentially forgivable PPP 

loans. A large share of those newly acquired funds were 

deposited into the banking system by consumers and 

small businesses. 

The Federal Reserve also played a role in the increase 

through its emergency lending programs and monetary 

policy. The Federal Reserve responded to the pandemic 

by offering or expanding certain borrowing programs. 

In addition to advertising discount window promotions, 

the Federal Reserve made available new borrowing 

programs that included the Payment Protection 

Program Liquidity Facility (PPPLF) to aid banks in 

maintaining adequate liquidity. In addition, throughout 

2020 the Federal Reserve remained committed to an 

asset purchase program under which it purchases 

Treasury and mortgage-backed securities from the 

private market. This program injects cash and liquidity 

into the economy, which increases bank deposit 

accounts. 

Community bank reliance on wholesale funding 

decreased as on-balance sheet liquidity improved. 

Community banks’ overall wholesale funding activity 

has steadily declined since 2017. The ratio of wholesale 

funding to total assets at community banks dropped 

from 19 percent in 2017 to 15 percent in 2020. In 

comparison, noncommunity banks with less than 

$100 billion in assets reported a wholesale funding to 

total assets ratio of 18 percent in 2020 compared to 

23 percent in 2017. Community banks generally rely 

less on wholesale funding compared to noncommunity 

banks, although both groups show a similar reduction in 

wholesale funding reliance since 2017. 

Wholesale funds can include federal funds purchased 

and securities sold under agreement to repurchase; 

borrowings from the Federal Home Loan Bank (FHLB); 

brokered and listing service, municipal and state, and 

foreign deposits; and other borrowings. Among those 

wholesale funding components, the most notable 

changes over the past three years were in borrowed 

funds and, to a lesser extent, brokered and listing service 

deposits. FHLB balances steadily declined from almost 

$112 billion in fourth quarter 2017 to $73 billion in 2020. 

Community banks also have relied less on brokered and 

listing service deposits, as reported aggregate balances 

Community Bank Deposits Exceeded $2 Trillion in 

Second Quarter 2020 and Continued to Climb 

1.86 1.86 1.83 1.83 1.84 

2.02 2.05 

2.13 

1.50

1.75

2.00

2.25

1Q2019 2Q2019 3Q2019 4Q2019 1Q2020 2Q2020 3Q2020 4Q2020

Deposits

$ Trillions

Source: FDIC.

Chart 54
64 | 2021 Risk Review

decreased by more than $2 billion in the past year, 

although some of this decline may be due to a reporting 

change rather than a reduction in funding source.88

These declines since 2017 offset an increase in other 

borrowings (Chart 55).

Conversely, other borrowings by community banks 

increased in 2020 primarily because of government 

programs introduced in the first half of the year. Roughly 

85 percent of the other borrowings reported in fourth 

quarter 2020 includes credit extended through the 

PPPLF. Not every financial institution that originated 

PPP loans took advantage of the PPPLF, but those that 

did were extended credit at marginal cost and at full 

face value of the PPP loans that served as collateral. The 

PPPLF was an attractive source of funding for banks that 

participated. 

Weak loan growth in 2020 contributed to improved 

liquidity among community banks. Traditionally, banks 

use excess liquidity to fund new loans. Absent PPP loan 

activity, loan growth at community banks was modest last 

year, consistent with the weak economy and uncertain 

outlook. Although many banks observed an increase in 

deposits, far fewer were able to successfully deploy that 

extra liquidity into new loans. Loan volume as a percent of 

88 In 2018, a change in the treatment of reciprocal brokered deposits was made to the Call Report instructions that affected what is reported as brokered deposits. 

See Call Report instructions, Schedule RC-E, memoranda item 1.b., for more information. 89 Short-term liquid assets include cash and due from accounts, federal funds sold, securities purchased under resale agreements, and securities maturing in less than 

one year.

total assets dropped from 71 percent in 2019 to 67 percent 

in 2020 at community banks. 

Uncertainty in the economy, coupled with a sudden rise 

in deposits, led many community banks to allocate a 

higher percentage of assets to readily available liquidity 

sources, such as cash and due from accounts, securities 

maturing in less than a year, and federal funds sold, 

some of which increased significantly in 2020. Among 

community banks, the median short-term liquid assets 

to total assets ratio increased year over year from 

11 percent in fourth quarter 2019 to 15 percent in fourth 

quarter 2020 (Chart 56).89

Sudden changes to depositor behavior could challenge 

community bank liquidity. While many community 

banks ended 2020 flush with liquidity, the permanence 

of new consumer and business deposits is unknown. 

The reduction in bank borrowings and other wholesale 

funding components correlates with increased deposits 

and enhanced on-balance sheet liquidity. However, 

the long-term liquidity position for community banks 

remains uncertain. Liquidity levels will depend on how 

long consumers and businesses hold funds in risk-free 

deposit accounts. Deposits that exit banks more quickly 

than anticipated could create higher liquidity risk for 

banks that are not adequately prepared.

Community Banks Shifted Funding Sources as 

Liquidity Increased

0

20

40

60

80

100

120

140

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

FHLB Borrowings

Brokered and Listing Service Deposits

Other Borrowings

Community Bank Funding Sources

$ Billions

Source: FDIC.

Chart 55

Community Bank Deposit Growth Outpaced Loan 

Growth, While Short-Term Liquidity Levels Climbed

65

63 63

64

66

68

69 70 72 71

67

10

15

0

2

4

6

8

10

12

14

16

58

60

62

64

66

68

70

72

74

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Loans to Total Assets (Le Axis)

Median Short-Term Liquid Assets to Total

Assets (Right Axis)

Loans to Total Assets

Percent 

Short-Term Liquid Assets to Total Assets

Percent

Source: FDIC.

Chart 56