Section II: Economic, Financial 

Markets, and Banking Industry 

Overview 

Economy 

• The U.S. economy expanded in 2021, surpassing the pre-pandemic output peak in second quarter, as an uneven 

recovery continued across industries and regions. 

• Labor markets strengthened as the unemployment rate fell. But labor shortages surfaced in key industries and 

labor force participation rates remained low. 

• Inflationary pressures and supply chain issues increased in the second half of the year, creating challenges for 

businesses and posing risks to banks. 

• The expiration of government programs that supported consumers and businesses was a headwind to 

economic growth in the second half of 2021. 

• Reduced assistance to consumer and business borrowers, prolonged pandemic conditions, and higher inflation 

may create increased risks for banks. 

The economic recovery continued in 2021, and output 

surpassed the previous peak in the second quarter. 

The economy expanded in each quarter in 2021, building 

off strong growth in the second half of 2020 after a 

deep recession brought on by the COVID-19 pandemic 

(Chart 1). Real gross domestic product (GDP) increased 

5.7 percent in 2021 after decreasing 3.4 percent in 2020. 

The pandemic continued to affect the rate of recovery 

in 2021. The rollout of vaccines in the spring supported 

economic growth, boosted consumer sentiment, and 

allowed for the lifting of some restrictions on activity. 

Government assistance in the form of forgivable loans 

to businesses through the PPP and increased social 

benefits to households was a tailwind to the economy 

in 2021. The economic recovery and broader reopening 

that occurred during the summer months led to strong 

consumer spending (Chart 2). However, GDP growth 

slowed in the third quarter with the resurgence of the 

pandemic and as government assistance programs 

Chart 1 

Gross Domestic Product Expanded in 2021 in Spite 

of the Pandemic 

Real U.S. Gross Domestic Product 

Quarterly percent change at annual rate 

40 

30 

20 

10 

0 

-10 

-20 

-30 

-40 

2013 2014 2015 2016 2017 2018 2019 2020 2021 

Source: Bureau of Economic Analysis (Haver Analytics). 

Note: Shaded area indicates recession. 

2022 Risk Review | 7 
8 | 2022 Risk Review 

 

 

 

expired. Economic growth accelerated in the fourth 

quarter as inventory accumulation and renewed 

consumer spending led gains. 

Federal supplemental unemployment insurance, which 

had supported people who were unemployed due to the 

pandemic and covered jobs that were not traditionally 

eligible, ended in September. While GDP growth 

improved in fourth quarter on inventory accumulation 

and renewed consumer spending, the resurgence of the 

pandemic at year-end weighed on economic activity and 

sentiment. 

The unemployment rate fell from 6.4 percent in January 

to 3.9 percent in December, as labor markets recovered 

more quickly than expected. However, increased 

economic activity nationwide led to a strong demand 

for workers and a subdued labor force led to a shortage 

of workers. Job openings increased across industries, 

reaching record levels since data collection began in 

2000. Wages increased faster than in previous years as 

firms offered more pay to attract workers. The labor force 

participation rate ended the year up from its pandemic 

lows but still 1.5 percentage points below the February 

2020 level. The labor force participation rate remained 

low for workers aged 65 or more and women aged 25 to 

54, while participation improved for other groups. 

Map 1 

Individual states and industries have faced an uneven 

economic recovery as the pandemic continued to 

weigh on business operations. Factors that affected 

particular industries and the speed of reopening at the 

state and local level continued to weigh on the recovery 

in 2021. States with a higher share of populations and 

industries most affected by the pandemic, such as 

leisure and hospitality, were slower to recover (Map 1). 

Chart 2 

Consumer Spending Drove Economic Growth in the 

First Half of 2021 but Slowed in the Second Half 

Contribution to Change in Gross Domestic Product 

Percent Consumption 12 Business Investment 

10 Government 

Exports 

8 Imports 

6 

4 

2 

0 

-2 

-4 

Q1 Q2 Q3 Q4 

Source: Bureau of Economic Analysis (Haver Analytics). 

Note: Data are for 2021. 

The Recovery in Jobs Lost Has Been Uneven Across States 

Percentage of Jobs That Were Lost Between March and April 2020 That Were Recovered as of December 2021 

46 Share of Jobs Recovered

 Top 5

 Above Nationwide Average

 Below Nationwide Average

 Bottom 5 

86 

52 

58 

89 

72 89

78 

89 

67 93 89 

76 

79 

100 

121 

143 

104 

106 

82 

62 

71 

76 

77 

74 

80 

81 

71 91 

81 

82 

82 

75 

75 

63 

71 

79 

93 

91 88 97 

92 

92 

78 

80 

75 

78 

79 

81 

47 

National Average: 84 percent 

Source: Bureau of Labor Statistics (Haver Analytics). 

Note: Among the Bottom 5 is Washington, D.C., which has recovered 47 percent of jobs lost. 

58 
2022 Risk Review | 9 

Supply chain challenges surfaced early in 2021 

and worsened over much of the year as pandemic 

conditions altered demand and affected production. 

Consumer spending on both durable and nondurable 

goods was strong throughout 2021. As sentiment 

rebounded, demand outstripped supply and global 

supply chains were constrained by the ongoing 

pandemic. The global shortage in semiconductor 

processors continued, increasing production times for 

a range of durable goods including automobiles. Delays 

and backlogs at ports due to a shortage of workers 

and other factors increased shipping times and cost 

of transportation, adding to supply chain challenges. 

After dropping sharply in 2020, manufacturing activity 

recovered in 2021 despite supply chain challenges. 

Inflationary pressures increased in the second half 

of the year as strong demand and supply chain 

challenges reduced the availability of goods and 

increased costs. Both the headline consumer price 

index (CPI), a measure of overall inflation in the United 

States, and core CPI, which excludes more volatile food 

and energy prices, increased rapidly in the second half of 

2021 (Chart 3). Increasing price pressures first emerged 

in industries most affected by the pandemic, including 

travel and used automobiles. As the recovery progressed 

and producer prices remained elevated, inflation rose 

Chart 3 

in broader segments of the economy, including food 

and shelter. Tight labor markets and the inability of 

businesses to hire workers in key sectors, including 

restaurants and leisure, led to faster wage growth. 

The headline CPI inflation rate rose to 7.0 percent in 

December, the highest rate since the early 1980s. 

Government support programs that helped boost 

economic activity in 2021 waned during the second 

half of 2021 and monetary policy tightened. 

Government pandemic-related support enacted in 2020 

continued in 2021. Additional rounds of support through 

the American Rescue Plan, passed in March 2021, 

provided direct payments to households, enhanced 

unemployment insurance, and additional funding 

for small business loans. Enhanced unemployment 

insurance ended in September, though some states 

ended it earlier on the strength of labor markets. 

Relative to its effect on GDP in previous quarters, direct 

government support was less of a boost to growth in the 

second half of 2021. By the end of 2021, 80 percent of 

PPP loans had been fully or partially forgiven. 

The Federal Reserve continued to conduct 

accommodative monetary policy to support the 

economy through asset purchases and left the federal 

funds rate unchanged in 2021. Near the end of the year, 

as the labor market tightened and inflation rose, the 

Both the Headline and Core Consumer Price Index Reached Multi-Decade 

Highs 

Year-Over-Year Percent Change 

-3 

-2 

-1 

0 

1 

2 

3 

4 

5 

6 

7 

CPI Core CPI 

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 

Source: Bureau of Labor Statistics (Haver Analytics). 

Note: Shaded areas indicate recession. CPI measures average change over time in prices consumers pay for a basket 

of goods and services. Core CPI excludes more volatile components, including food and energy. 
10 | 2022 Risk Review 

Federal Reserve tightened monetary policy by reducing 

the pace of monthly net asset purchases. In addition, 

as financial conditions normalized in 2021, the Federal 

Reserve stopped extending credit through its pandemicera lending facilities. 

Reduced assistance to borrowers and prolonged 

pandemic conditions may create credit risk for banks. 

Improvement in the labor market and government 

assistance programs supported both businesses and 

consumer credit conditions and increased the demand 

for loans. The curtailment of federal assistance may 

make it challenging for some borrowers to stay current 

on loans, particularly if their savings run out. In addition, 

banks with lending exposure to industries vulnerable to 

the pandemic may face asset quality deterioration after 

government support programs end. 

Continued inflationary pressures also pose risks to 

some lenders. Economic conditions remain uncertain 

and vary greatly across sectors and geographies. 

The outlook for banks should improve with overall 

economic conditions as supply chain pressures abate 

and demand normalizes, but banks face downside 

risks from inflation or slower-than-expected economic 

growth. Higher inflation may pose credit risk to banks 

if it limits the ability of borrowers to stay current on 

loans, particularly if borrower incomes do not rise and 

business sales decline as consumers reduce spending. 

Higher inflation also leads to higher nominal interest 

rates, which affect both assets and liabilities on a bank’s 

balance sheet. Traditionally, the liabilities on a bank’s 

balance sheet tend to reprice more quickly than longerterm assets, which can weigh on NIMs and expose banks 

to increasing pressure from interest rate risk, particularly 

those that issued longer-term loans in search of higher 

yields, as discussed later in this report. 
2022 Risk Review | 11 

Financial Markets 

• In 2021, the focus of financial markets gradually shifted from the pandemic to inflation. Market conditions 

deteriorated in early 2022 upon heightened geopolitical risks. 

• Bank reserves held at the Federal Reserve reached an all-time high in December 2021 due to Federal Reserve 

asset purchases and a steep decline in Treasury cash balances. Corporate credit conditions remained 

favorable. Corporations took advantage of low interest rates in 2021 by borrowing more in capital markets, 

issuing a record amount of high-yield bonds and leveraged loans. 

• Banking sector risks from financial markets moderated in 2021. While financial market conditions deteriorated 

in early 2022, funding conditions remained generally favorable. 

In 2021, the focus of financial markets gradually 

shifted from the pandemic to inflation. In early 2021, 

market movements reflected anticipation of the effects 

of a reopening of the economy, as much of the U.S. 

population began to receive vaccinations. In later 

months, a resurgence of the pandemic dampened the 

outlook, and inflationary pressures increased owing to 

supply chain issues and stronger consumer spending. 

While markets reacted negatively to the prevalence of 

new COVID-19 variants, by year-end market participants 

showed more concern about higher inflation and the 

effect on the outlook for interest rates and the economy. 

Financial market conditions deteriorated in early 2022 

when tensions between Russia and Ukraine intensified. 

Commodity prices increased and inflation expectations 

rose further. Corporate bond spreads widened and 

Chart 4 

prices declined for leveraged loans and equities, among 

other assets. Financial market activities declined, 

with lower corporate bond issuance, municipal bond 

issuance, and initial public offerings in equity markets. 

Treasury yield curve shifts in 2021 reflected 

an improving economy and monetary policy 

developments. Early in 2021, the U.S. Treasury yield 

curve steepened as expectations grew for the economy 

to reopen. The two-year Treasury yield remained below 

20 basis points for the first five months of the year, as 

market participants generally expected that pandemicrelated inflation would be temporary (Chart 4). On 

the longer end of the curve, ten-year Treasury yields 

increased more than 80 basis points in the first three 

months of the year, from 0.93 percent on December 31, 

2020, to 1.74 percent on March 31, 2021. 

The Spread Between the Ten-Year and Two-Year Treasury Yields Narrowed 

as the Year Ended, Flattening the Yield Curve 

Yield 

Percent 

2.0 

0.0 

0.2 

0.4 

0.6 

0.8 

1.0 

1.2 

1.4 

1.6 

1.8 

The two-year Treasury yield 

ended the year on an 

upward trajectory. 

The ten-year Treasury yield increased 

by more than 80 basis points 

in the first three months of 2021. 

Ten-Year Treasury Yield 

Two-Year Treasury Yield 

Jan-2021 Mar-2021 May-2021 Jul-2021 Sep-2021 Nov-2021 Jan-2022 

Source: Federal Reserve Board (Federal Reserve Economic Data). 
12 | 2022 Risk Review 

 

Toward the end of 2021, medium-term interest rates, 

such as the two-year and five-year, rose as the Federal 

Reserve shifted its monetary policy stance. The Federal 

Reserve reduced the pace of its asset purchases in 

November 2021 and further reduced the pace in 

subsequent months. These moves increased market 

expectations for the Federal Reserve to begin raising 

short-term interest rates as early as March 2022. As 

markets anticipated short-term rate increases, the 

two- and five-year Treasury yields increased, and the 

yield curve flattened between the two-year and tenyear Treasury yields. The flattening of the Treasury 

yield curve also accelerated in early 2022 reflecting 

expectations for higher near-term inflation and slower 

economic growth. 

Cash in the financial system grew during the year, 

pushing overnight rates even lower. The growth in cash 

was largely a result of Treasury’s $1.5 trillion drawdown 

of cash balances that shifted cash into private markets 

and the Federal Reserve’s continued asset purchases, 

which totaled $1.5 trillion during the year (Chart 5). 

The abundance of liquidity put downward pressure on 

overnight interest rates. 

Chart 5 

The Secured Overnight Funding Rate (SOFR), a broad 

repurchase agreement (repo) benchmark and the 

Federal Reserve’s preferred replacement for the London 

Interbank Offered Rate (LIBOR), fell to 0.01 percent 

in March (Chart 6). Overnight secured funding rates 

continued to hover near zero until the Federal Reserve 

implemented a technical adjustment in June to lift the 

rate paid on bank deposits at the Federal Reserve and 

the rate on its overnight reverse repurchase agreement 

(ON RRP) facility. 

Throughout the pandemic, Federal Reserve asset 

purchases resulted in higher bank reserves. The impact 

of Federal Reserve asset purchases on bank reserves 

was mitigated somewhat in 2020 by large increases 

in the Treasury General Account (TGA) as the Treasury 

Department issued debt to market participants, 

effectively absorbing some of the liquidity in the 

banking system. However, in 2021, the TGA declined as 

Treasury security issuance declined and the government 

increased spending, shifting the liquidity into the private 

market. Bank reserve balances rose to an all-time high 

of $4.3 trillion in December 2021. A high level of lowyielding bank reserves can challenge bank earnings. 

Federal Reserve Asset Purchases Resulted in Higher Bank Reserves 

$ Trillions 

U.S. Treasury Securities 

Mortgage-Backed Securities 

Repurchase Agreements, Swaps, 

Credit, and Liquidity Facilities 

Other Assets 

Federal Reserve Notes and 

Other Liabilities 

Deposits Held by Depository 

Institutions (Reserves) 

Overnight Reverse 

Repurchase Agreements 

U.S. Treasury General Account (TGA) 

Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 

Source: Board of Governors of the Federal Reserve System H.4.1 Statistical Release. 

Jul-21 Oct-21 

10 

8 

6 

4 

2 

0 

2 

4 

6 

8 

10 

Assets 

Liabilities 

A steep decline in the TGA 

contributed to growth in bank reserves. 

Bank reserve balances reached an 

all-time high of $4.3 trillion in mid-December 2021. 
2022 Risk Review | 13 

 

 

 

Chart 6 

Excess Liquidity Kept Overnight Interest Rates Low in 2021 

Yield 

Percent EFFR 

SOFR 0.16 

IORB 

Jan-2021 Mar-2021 May-2021 Jul-2021 Sep-2021 Nov-2021 

Source: Federal Reserve Bank of New York. 

Note: IORB=Interest on Reserve Balances Rate. EFFR=Effective Federal Funds Rate. OBFR=Overnight Bank 

Funding Rate. SOFR=Secured Overnight Financing Rate. BGCR=Broad General Collateral Rate. See Federal 

Reserve Reference Rates at https://www.newyorkfed.org/markets/reference-rates. Data through December 

31, 2021. 

0.00 

0.02 

0.04 

0.06 

0.08 

0.10 

0.12 

0.14 OBFR 

BGCR 

ON RRP 

Corporate credit conditions remained favorable in 

2021. Corporations took advantage of low interest 

rates by borrowing at high levels and issuing a record 

amount of high-yield bonds and leveraged loans. 

Corporate credit spreads were low throughout the 

year for both investment-grade and high-yield bonds. 

Corporations issued $1.96 trillion in corporate bonds, 

surpassing pre-pandemic levels but trailing the 2020 

record issuance. Investment-grade issuance declined 

20 percent year over year, down from a record level in 

2020. High-yield issuance increased 15 percent year over 

year to a record-setting $485 billion (Chart 7). 

Leveraged loan issuance totaled $615 billion in 2021, 

surpassing the previous annual record by more than 

20 percent. Loans funding mergers and acquisitions 

reached a record $331 billion for the year. Demand for 

leveraged loans was strong, particularly toward the end 

of the year when investors sought products with variable 

rates to protect against rising interest rates. 

Borrowing conditions remained favorable in 2021, 

despite the Federal Reserve reducing its direct support 

for the corporate bond market.2 Burgeoning signs of 

economic growth lowered perceptions of credit risk, 

keeping corporate bond spreads low throughout 

the year. Higher inflation and expectations for rising 

interest rates also encouraged corporate borrowing 

as corporations looked to lock in debt at low rates. 

Corporate bond spreads rose in early 2022 to mid2020 levels, as geopolitical events reduced market risk 

appetite. 

Like corporations, municipalities took advantage of 

low interest rates by issuing a near-record amount 

of bonds. At $480 billion, municipal bond issuances 

for 2021 were slightly below the record-setting 2020 

level. Most of the municipal bonds issued—$319 billion 

compared with $275 billion in 2020—were to fund 

new capital projects. Borrowing conditions remained 

favorable for municipalities despite the Federal Reserve 

reducing its direct support for the municipal bond 

market in 2021.3 Government support programs for state 

and local governments and low interest rates propelled 

municipal borrowing. Expectations for possible tax 

increases encouraged investors to seek municipal bonds 

that offered tax-exempt interest payments. Taxable 

bond issuance declined approximately 18 percent over 

2 The Federal Reserve ceased purchases of corporate bonds at the end of 2020 and began selling holdings of corporate bond exchange-traded funds in June 2021. 

3 The Federal Reserve ceased purchases of municipal bonds at the end of 2020. 
14 | 2022 Risk Review 

 

 

Chart 7 

Borrowing Conditions Were Favorable in 2021 as Corporations Issued 

Record Amounts of High-Yield Bonds 

Corporate Bond Issuance 

$ Trillions High-yield bond issuance in 2021 

2.5 increased by 15 percent from 2020. 

0.0 

0.5 

1.0 

1.5 

2.0 

High-Yield Investment Grade 

2013 2014 2015 2016 2017 2018 2019 2020 2021 

Source: Securities Industry and Financial Markets Association. 

the past year, while nontaxable bond issuance increased 

approximately 8 percent. 

Equity indices performed well in 2021. The Standard 

and Poor’s (S&P) 500 Index posted total returns of 

28.7 percent for the year, while the Dow Jones Industrial 

Average returned 20.9 percent and the NASDAQ 

Composite returned 22.2 percent. All 11 sectors of the 

S&P 500 posted double-digit returns, helping the S&P 

500 notch 70 record-high closes and finish with doubledigit gains for the third straight year. 

Following an underperformance in 2020, bank stocks 

outperformed the S&P 500 in 2021. The KBW Bank 

Index, which includes 24 of the largest U.S. banking 

organizations, had a total return of 36 percent. The 

broader S&P 500 Financials sector was the thirdbest performer of the 11 S&P sectors, with a return 

of 34.9 percent in 2021. Bank stock performance 

in 2021 largely tracked the increase in longer-term 

Treasury yields that support bank income. Much of 

the outperformance relative to the S&P 500 can be 

attributed to the first three months of the year, a period 

in which the ten-year Treasury yield rose by more than 

80 basis points. 

Similar to banks, commodities and energy companies 

posted strong gains in 2021. The Bloomberg Commodity 

Index gained 27 percent in 2021, led by 50 percent or 

higher increases in prices for coffee, lumber, heating 

oil, crude oil, and gasoline. The S&P 500 Energy sector 

rebounded from the worst-performing sector in 2020 to 

the top performer in 2021, with returns of 54.4 percent. 

Overall, financial markets were stable in 2021 and 

market conditions were generally supportive of banking 

conditions. Conditions deteriorated in early 2022, as 

geopolitical tensions driven by Russia’s invasion of 

Ukraine altered many of the financial market trends 

observed in 2021. Geopolitical tensions and tightening 

financial conditions create a heightened level of 

uncertainty for the banking sector. While inflation and 

rising interest rates come with the risk of asset repricing, 

many banks could benefit from easing pressure on net 

interest margins. However, in the near term, low interest 

rates and high amounts of liquidity are likely to continue 

to pressure bank earnings. 
2022 Risk Review | 15 

 

 

 

 

 

 

 

 

Banking Industry 

• Banks reported higher net income in 2021 primarily due to negative provision expense. 

• NIM decreased, reflecting the low interest rate environment. 

• Loan growth improved from 2020 levels, reflecting improved economic sentiment. 

• Asset quality metrics continued to improve. 

Banks reported higher earnings in 2021 primarily due 

to negative provision expense. Industry net income for 

2021 rose 89.7 percent ($132.0 billion) from 2020 levels 

to $279.1 billion (Chart 8). The banking industry reported 

aggregate negative provision expense of $31.0 billion for 

2021 as banks reassessed the risk of the pandemic and 

economic uncertainty on their loan portfolios. Negative 

provision expense was significantly less than the positive 

$132.3 billion in provision expense reported in 2020. 

Similar to the improved earnings, the return on average 

assets (ROA) ratio for the banking industry improved to 

1.23 percent in 2021 from 0.72 percent in 2020. 

Community bank net income increased 29.3 percent in 

2021 to $32.7 billion. The improvement was due to rising 

net interest income in combination with lower provision 

expense (Chart 9). Stronger loan growth and recognition 

of deferred PPP loan fees contributed to the rise in 

net interest income. Provision expense for community 

Chart 8 

banks, while lower than the 2020 level, was $1.1 billion 

for 2021. The average ROA ratio for community banks 

also increased, from 1.09 percent in 2020 to 1.25 percent 

in 2021. 

Despite the negative provision expense for the industry 

in 2021, the allowance for expected credit losses (ACL) 

remained higher than the pre-pandemic level at yearend 2019. The ACL as a percentage of total loans and 

leases was 1.58 percent, well above the 1.18 percent at 

year-end 2019. 

NIM declined in 2021 despite a slight increase in net 

interest income and strong asset growth. Net interest 

income for the industry rose $687 million (0.1 percent) 

to $527.4 billion from 2020 but remained below the 

pre-pandemic level of $546.7 billion in 2019. Yields on 

earning assets dropped 52 basis points from 2020 to 

2.71 percent, while the cost of funding those assets 

Negative Provision Expense Was the Primary Driver of Improved Full-Year 

Net Income in 2021 

$ Billions 

$0.7 $20.3 

-$163.3 

$11.1 

-$5.1 

$36.1 

-240 

-200 

-160 

-120 

-80 

-40 

0 

40 

80 

120 

160 

+0.1% +7.2% -123.4% +2.2% -63.1% +99.4% +89.7% 

$132.0 

Net Interest Noninterest Provisions Noninterest Securities Applicable Net Income 

Income Income Expense Gains Income 

(Losses) Taxes 

Source: FDIC. 

Note: Solid bar depicts the item had a negative effect on net income; striped bar depicts the item had a positive 

effect. Data reflect full-year 2021 vs full-year 2020 income. 
16 | 2022 Risk Review 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chart 9 

Higher Net Interest Income Drove Higher Net Income at Community Banks 

$ Billions 

10 $7.4 $6.8 

$3.9 5 

$2.3 

$1.0 

0 

-$0.2 

-5 

-$6.0 

9.3% 4.1% -84.7% 6.5% -20.9% 45.8% 29.3% 

Net Interest Noninterest Provisions Noninterest Securities Applicable Net Income 

Income Income Expense Gains Income 

(Losses) Taxes 

-10 

Source: FDIC. 

Note: Solid bar depicts the item had a negative effect on net income; striped bar depicts the item had a positive 

effect. Data reflect full-year 2021 vs full-year 2020 income. 

dropped 24 basis points, bringing NIM down from 

2.82 percent in 2020 to 2.54 percent in 2021 (Chart 10). 

Community bank net interest income rose by $6.8 billion 

from 2020, or 9.3 percent, on relatively higher loan 

growth and recognition of deferred PPP loan fees. 

Growth in earning assets, however, still outpaced 

community bank net interest income gains, reducing 

the NIM. The average community bank NIM fell 12 basis 

points to 3.27 percent last year from 2020. Low interest 

rates, slow loan growth, and substantial growth in lowyielding assets kept net interest income low. 

Low-yielding assets—cash and balances due from 

other institutions—remained high for the industry at 

$3.6 trillion. These assets grew 12 percent or $370 billion 

in 2021, well below the substantial growth of $1.5 trillion 

in 2020. Elevated levels of low-yielding assets will 

continue to be a drag on NIM. 

Improvement in noninterest income further bolstered 

the rise in net income. Noninterest income for the 

industry rose $20.3 billion (7.2 percent), outpacing the 

rise in noninterest expense of $11.1 billion (2.2 percent) 

in 2021. Increased bank card and interchange fees 

of $8.6 billion and loan servicing fees of $6.6 billion 

contributed most to the higher levels of noninterest 

income. Noninterest expense growth was primarily 

driven by increases in salaries, which were up 6.1 percent 

or $14.5 billion during the year, and consulting fees, 

which were up by 47 percent or $2.5 billion. 

Chart 10 

Net Interest Margin Continues to Decline Despite an 

Increase in Net Interest Income 

Percent 

4.5 

4.0 

3.5 

3.0 

Community Banks NIM 

Industry NIM 2.5 

1986 1991 1996 2001 2006 2011 2016 2021 

Source: FDIC. 

2.0 

Loan balances rose from 2020, but growth in loweryielding assets drove balance sheet growth. Loans grew 

3.5 percent in 2021, slightly higher than the 3.3 percent 

growth rate in 2020. While growth in 2020 reflected 

about $408 billion in PPP loans added to bank books, 

2021 growth reflected $312 billion in PPP loans forgiven 

or repaid and removed from bank books. Excluding 

PPP loans, the loan growth rate in 2021 would have been 

6.6 percent. Community banks would have recorded a 

loan growth rate of 7.6 percent excluding PPP versus 

the reported total loan growth rate of 2.0 percent. This 

PPP-adjusted community bank loan growth rate was 
2022 Risk Review | 17 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

higher than the industry overall and higher than the 

merger-adjusted loan growth rate of 5.5 percent reported 

in fourth quarter 2019. Industry loan growth occurred 

in most categories, with the largest dollar increases in 

loans to nondepository institutions, consumer loans, and 

CRE loans. Despite widespread loan growth, loans were 

less than 50 percent of total assets, 8 percentage points 

lower than the five-year average from 2014 through 2019. 

Community banks also saw a decline in the ratio of loans 

to assets, from 71 percent at year-end 2019 to 62 percent 

at year-end 2021. 

Bank balance sheets continued to hold historically 

high levels of safe and liquid assets in 2021. Cash and 

balances due from other institutions rose $370 billion, 

almost as much as loans, in 2021 (Chart 11). With the rise 

of medium- and long-term interest rates in 2021, banks 

invested heavily in long-term assets including securities 

that grew 22 percent to $6.2 trillion and mortgage-backed 

securities that were up 17 percent to $3.6 trillion. Banks 

may have invested in longer-term assets to improve NIMs. 

Longer-term assets, those with maturities greater 

than three years, increased to 39 percent of assets 

compared with 36 percent pre-pandemic (Chart 12). 

Eighty-seven percent of banks increased their holdings 

of assets with greater than five-year maturities. 

Chart 11 

Community banks also increased their holdings of 

assets with maturities over three years, which reached 

52 percent of total assets at year-end 2021. 

Asset quality metrics continued to improve in 2021. 

Noncurrent loan rates and net charge-off rates declined 

in 2021 to pre-pandemic lows. The noncurrent loan rate 

for the industry fell to 0.89 percent at year-end 2021, 

below the 1.19 percent reported in 2020 and less than 

the pre-pandemic rate of 0.91 percent in 2019 (Chart 13). 

Noncurrent rates declined across all loan types, with 

1–4 family residential loans seeing the greatest decline. 

The annual average net charge-off rate for the industry 

declined from 0.50 percent to 0.25 percent in 2021. The 

dollar volume of net charge-offs was below the 2020 level 

in all loan categories except multifamily and 1–4 family 

construction. However, the decline in ACL exceeded 

the decline in noncurrent loans in 2021. As a result, 

the reserve coverage ratio for noncurrent loans (ACL as 

a percentage of noncurrent loans) declined modestly 

from 184 percent in 2020 to 179 percent but remained 

well above the pre-pandemic level of 130 percent. 

Community banks also reported improvement in asset 

quality metrics for the year. The noncurrent loan rate of 

0.58 percent for community banks was down 19 basis 

points from 2020. The noncurrent loan rate declined 

Since the Pandemic Began, Most Bank Asset Growth Has Been in Securities 

and Cash Accounts 

$ Trillions Gross Loans and Leases 

25 Securities 

Cash and Due From Balances 

All Other Assets 20 

13.3% 

15 8.9%

10 

5 

0 

56.4% 

21.4% 

47.4% 

26.3% 

15.0% 

11.2% 

49.7% 

23.4% 

14.6% 

12.4% 

2019 2020 2021 

Source: FDIC. 

Note: Bars show total gross loans, securities, cash and due from balances, and all other assets amounts from 

bottom to top. Percent of total assets is represented on the bars. 2020 and 2021 do not sum to 100 percent due 

to rounding. 
18 | 2022 Risk Review 

 

Chart 12 

Assets With Maturities Greater Than Three Years Have Increased to Almost 

40 Percent of Total Assets 

0 

5 

10 

15 

20 

25 

30 

35 

40 

45 

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

3–5 Years 5–15 Years > 15 Years 

Percent of Total Assets 

Source: FDIC. 

Note: Date labels are centered under the first quarter of each year. Data start in fourth quarter 2007. 

Chart 13 

for all major loan portfolios except the commercial and 

industrial (C&I) portfolio, which saw a modest 5 basis 

point increase to 0.71 percent. The annual net charge-off 

rate declined to 0.09 percent, down 6 basis points from 

2020. 

Improvements in the economy were evident in the 

decline in the number of “problem banks” to 44 at yearend 2021 from 56 at year-end 2020. In addition, no banks 

failed in 2021 while four failed in 2020. 

Despite Early Concerns at the Onset of the Pandemic, Noncurrent Rates Are 

at Low Levels 

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

Noncurrent Rate 

Percent 

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

Total Noncurrent Rate 

Commercial & Industrial 

Construction & Development 

1–4 Family Residential 

Nonfarm Nonresidential Real Estate 

Credit Cards 

Source: FDIC. 

Note: Percent of loans that are 90 days or more past due or in nonaccrual status. 

Although banking industry conditions remained 

strong, challenges remain. Rising interest rates, 

continued transition through the pandemic, and 

geopolitical tensions may negatively affect bank 

profitability, credit quality, and loan growth going 

forward. In particular, rising interest rates could 

adversely affect real estate and other asset values and 

borrower repayment capacity.