FEDERAL DEPOSIT INSURANCE CORPORATION 

Risk Review 

2022 

www.fdic.gov 

2022 

Risk Review 
PAGE INTENTIONALLY LEFT BLANK 
Table of Contents 

Introduction .............................................................................................................................. 1 

Section I: Executive Summary ..................................................................................................... 3 

Key Risks to Banks........................................................................................................................ 4 

Section II: Economic, Financial Markets, and Banking Industry Overview........................................ 7 

Economy ..................................................................................................................................... 7 

Financial Markets........................................................................................................................11 

Banking Industry ........................................................................................................................15 

Section III: Key Risk to Banks .................................................................................................... 19 

Credit Risk....................................................................................................................................... 19 

Agriculture .................................................................................................................................19 

Commercial Real Estate ...............................................................................................................24 

Consumer Debt ...........................................................................................................................29 

Energy .......................................................................................................................................33 

Housing .....................................................................................................................................37 

Leveraged Lending and Corporate Debt.........................................................................................42 

Nonbank Lending........................................................................................................................46 

Small Business Lending ...............................................................................................................48 

Market Risk ..................................................................................................................................... 52 

Interest Rate Risk and Net Interest Margin.....................................................................................52 

Liquidity and Deposits .................................................................................................................56 

Operational Risk .............................................................................................................................. 59 

Cyber Threats and Illicit Activities.................................................................................................59 

Climate-Related Financial Risk.......................................................................................................... 64 

Climate-Related Events ...............................................................................................................64 

Acronyms and Abbreviations..................................................................................................... 69 

Glossary of Terms..................................................................................................................... 71 

2022 Risk Review | V 
PAGE INTENTIONALLY LEFT BLANK 

VI | 2022 Risk Review 
Introduction 

The FDIC was created in 1933 to maintain stability and 

public confidence in the nation’s financial system. A key 

part of accomplishing this mission is the FDIC’s work to 

identify and analyze risks that could affect banks. The 

Risk Review summarizes the FDIC’s assessment of risks 

related to conditions in the U.S. economy, financial 

markets, and the banking industry. The analysis of the 

banking industry pays particular attention to risks that 

may affect community banks. As the primary federal 

regulator for most community banks, the FDIC has a 

unique perspective on these institutions. 

The Risk Review presents key risks to banks in four 

broad categories—credit risk, market risk, operational 

risk, and climate-related financial risk. The credit risk 

areas discussed are agriculture, commercial real estate, 

consumer debt, energy, housing, leveraged lending and 

corporate debt, nonbank lending, and small business 

lending. The market risk areas discussed are interest rate 

risk and net interest margin, and liquidity and deposits. 

The 2022 Risk Review expands coverage of risks from 

prior reports by examining operational risk to banks 

from cyber threats and illicit activity and climate-related 

financial risks to banking organizations. Monitoring 

these risks is among the FDIC’s top priorities. 

Section I is an executive summary. Section II is an 

overview of economic, financial market, and banking 

industry conditions. Section III is an analysis of the key 

credit, market, operational, and climate-related financial 

risks facing banks.1 

1 This report contains banking information available as of December 31, 2021, with updates reflecting more recent market developments as of April 1, 2022. 

2022 Risk Review | 1 
PAGE INTENTIONALLY LEFT BLANK 

2 | 2022 Risk Review 
Section I: Executive Summary 

The banking environment improved in 2021 as the 

U.S. economy recovered from a severe recession in 

2020. The U.S. economy expanded in 2021, surpassing 

the pre-pandemic output peak in second quarter. 

However, the recovery was uneven across industries 

and regions. Labor markets improved, but labor-force 

participation rates remained weak and signs of labor 

shortages emerged in key industries. Global supply 

chain disruptions contributed to substantially higher 

inflation, pressuring consumer budgets and business 

costs. Economic growth slowed during the second half 

of the year, in part due to the expiration of government 

programs that supported consumers and businesses. 

Most baseline forecasts call for a modest deceleration 

in U.S. economic growth in 2022 from the effects of 

higher inflation and increased geopolitical uncertainty 

following Russia’s invasion of Ukraine. 

Financial market conditions were generally 

supportive of the economy and banking industry in 

2021. Corporate credit conditions remained favorable 

and corporate debt issuance remained strong amid 

low interest rates. Issuance of high-yield bonds and 

leveraged loans reached record highs. Equity markets 

rose and Treasury yields edged higher on economic and 

monetary policy developments. But financial market 

conditions deteriorated in early 2022 when tensions 

between Russia and Ukraine intensified. 

Banking sector profitability increased in 2021 as 

expenses declined and noninterest income rose. 

Banks reported substantially higher net income in 2021 

primarily due to lower credit loss provisions. Net interest 

income for the industry improved in the second half of 

2021 but remained below the 2020 level. Asset growth 

was concentrated in cash, interest-bearing balances, and 

securities, while loan growth remained weak. Stronger 

economic conditions helped support the improvement 

in asset quality during the year. Among community 

banks, net income rose and surpassed the pre-pandemic 

level in 2021, even as net interest income declined. 

2022 Risk Review | 3 
4 | 2022 Risk Review 

Key Risks to Banks 

Credit Risks: Credit conditions improved in 2021, 

helped by various government support programs 

for businesses and consumers, improving economic 

conditions, and supportive financial market 

conditions. 

• Agriculture: The agricultural sector had a strong 

year in 2021. The sector benefited from higher 

commodity prices, farm incomes, and farmland 

values that helped support agricultural loans 

held by the banking industry, particularly farm 

banks. Farm banks are defined as community 

banks with substantial exposure to the agricultural 

sector. Profitability of farm banks remained 

favorable despite weak loan demand and margin 

compression. Asset quality among farm banks 

improved in 2021, as loan repayments increased 

and loan extensions declined. Despite the current 

strength, rising production costs and supply chain 

problems that affect the agriculture sector may 

pose challenges to the banking sector in 2022. The 

conflict between Russia and Ukraine has created 

uncertainty about the prospects for exports of key 

agricultural commodities. 

• Commercial Real Estate: The commercial real 

estate (CRE) sector was generally resilient to 

pandemic developments during the year, and most 

property types rebounded from the initial setback 

in 2020. Industrial and multifamily properties 

performed relatively well, while office and some 

lodging and retail subtypes continued to struggle. 

The banking industry reported record high CRE 

loans in fourth quarter 2021, and community 

banks remain heavily involved in lending to this 

industry. While CRE asset quality remained strong, 

expiration of pandemic-related financial assistance 

and shifts in the market demand for CRE properties 

may affect future performance. 

• Consumer Debt: Consumer incomes and balance 

sheets remained strong during the year and 

supported consumer lending. Pandemic-related 

fiscal support programs boosted personal income 

in 2021 and lowered household debt burdens. 

Bank consumer loan balances grew in 2021, led 

by auto loans and other non-credit card consumer 

loans. Asset quality across all consumer loan 

categories improved. Community banks reported 

lower noncurrent rates than noncommunity 

banks for auto loans and credit card loans and 

higher noncurrent rates for other non-credit card 

consumer loans. Despite general improvements 

in 2021, consumer loans remain sensitive to 

pandemic developments and could be a source of 

risk for the banking industry. 

• Energy: The energy market rebounded in 2021, 

supporting energy lending conditions. Strong 

global oil consumption and limited production 

contributed to higher oil prices in 2021, but U.S. 

oil production was slow to return to pre-pandemic 

levels. The recovery of mining employment in 

energy-concentrated states was sluggish, and U.S. 

crude oil production did not increase until midyear as the market drew down existing inventory. 

Direct bank lending to oil and gas (O&G) firms 

declined in 2021, as the energy market relied 

more on corporate debt markets for funding. 

Although community banks have limited direct 

exposure to O&G firms, community banks that 

operate in energy-concentrated markets are 

exposed indirectly through their lending to 

consumers and businesses that rely on the energy 

sector. Increased geopolitical uncertainty has 

contributed to higher energy prices in early 2022. 

Russia’s invasion into Ukraine raises prospects 

for a significant global energy supply shock and 

increased market volatility. The conflict could also 

reshape energy policy and planning. 

• Housing: The housing market continued to 

strengthen during the year, supporting mortgage 

lending. Home price growth set a new record in 

2021 driven by strong demand, limited inventory 

of homes for sale, and low mortgage rates. 

Asset quality among bank residential mortgage 

portfolios improved, helped by continued 

government support and forbearance programs. 

Banks reported lower mortgage delinquency 
2022 Risk Review | 5 

rates, with community banks reporting lower 

delinquency rates than noncommunity banks. 

Mortgage lending by nonbank financial institutions 

continued to grow and outpaced bank lending. 

While housing market conditions were favorable 

in 2021 and supported mortgage asset quality, 

headwinds including increased mortgage rates 

from near-record lows may challenge the sector’s 

momentum. 

• Leveraged Lending and Corporate Debt: 

Corporate debt market conditions remained 

relatively stable in 2021 and corporate debt levels 

continued to grow. Banking sector exposure to 

the corporate debt market is generally through 

holdings of corporate debt and collateralized loan 

obligations, lines of credit to corporations, and 

participation in the arranging of leveraged loans 

and corporate bonds. Banks remain vulnerable to 

potential distress in the corporate debt markets, 

particularly if interest rates rise and challenge 

the financial conditions of highly leveraged 

corporations. While community banks generally 

have limited direct exposure to the corporate debt 

market, the banking industry remains vulnerable 

to adverse corporate debt market developments. 

• Nonbank Lending: Bank lending to nonbank 

financial institutions reached a record high in 

2021. Nonbank lending activity is concentrated 

in the largest banks; community banks have 

limited exposure. While the risks of bank lending 

to nonbank financial institutions is relatively 

moderate, lending to nonbank institutions exposes 

banks to broader risks from the financial system. 

• Small Business Lending: Small business 

conditions improved during the year, helped by 

improving economic conditions, a rebound in 

consumer spending, and continued government 

support, particularly the Paycheck Protection 

Program (PPP). Small business loans remained 

a large share of the community bank loan 

portfolio, and community banks remained 

active participants in the PPP program in 2021. 

However, aggregate small business loan growth 

declined in 2021 when the PPP ended in the 

second half of the year. Excluding PPP loans, small 

business commercial and industrial lending grew, 

especially among community banks. Despite 

the improvements in small business conditions, 

small businesses remain vulnerable to pandemic 

developments that may threaten asset quality. 

Market Risks: Market risks remain moderate overall. 

Low interest rates continue to challenge net interest 

margins and banking sector profitability. Liquidity 

levels in the banking industry remained strong and 

were supported by historically high levels of deposits 

and bank reserves. 

• Interest Rate Risk and Net Interest Margins: Low 

interest rates and excess liquidity continued to 

reduce bank net interest margins (NIMs), which fell 

to a record low in 2021. Banks sought to increase 

interest income by holding more long-term 

securities. Community banks invested in longer 

maturing assets with higher yields, which helped 

bolster NIMs compared to noncommunity banks. 

While higher interest rates could benefit banking 

industry interest income, they could be a source of 

risk for banks with substantial exposure to longerterm assets. 

• Liquidity and Deposits: In 2021, banking sector 

deposits, including deposits held by community 

banks, reached the highest level since data 

collection began in 1984. The growth in deposits 

resulted in high levels of cash on bank balance 

sheets while lending growth remained slow, 

contributing to higher levels of liquid assets. As 

liquid assets grew, banks reduced their reliance on 

wholesale funding. These conditions will continue 

to support bank balance sheets as the banking 

industry and economy recover from the pandemic. 

Operational Risks: Operational risks, including 

cybersecurity risks and risks related to illicit financial 

activity, remain elevated for the banking sector. 

• The number of ransomware attacks in the 

banking industry increased in 2021, and banks 

continued to discover vulnerabilities to their 

software and computer networks. The number and 
6 | 2022 Risk Review 

sophistication of cyber attacks also increased with 

remote work and greater use of digital banking 

tools. Moreover, threats from illicit activities 

continue to pose risk management challenges to 

banks. 

Climate-Related Financial Risk: The effects of climate 

change present emerging risks to the banking 

industry. 

• Climate-related financial risks include physical 

risks from harm to people and property and 

transition risks from the shifts in policy, sentiment, 

and technology associated with a transition toward 

reduced carbon reliance. In 2021, severe climaterelated events resulted in $145 billion in damages, 

the third most-costly year since 1980. Two 

hurricanes, several wildfires, and a serious drought 

affected many local communities and the banks 

that operate there. Severe climate-related events 

can disrupt local economic conditions and present 

risk across the banking industry, regardless of an 

institution’s size, complexity, or business model. 

This discussion of climate-related financial risks 

focuses only on physical risks to communities and 

banks from severe climate-related events in 2021, 

as transition risk is a longer-term, prospective 

risk that is beyond the scope of this retrospective 

review. 
 

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. 
 

 

 

Section III: Key Risk to Banks 

CREDIT RISK 

Agriculture 

• The agricultural sector had a strong year, marked by increases in commodity prices, farm incomes, and 

farmland values. 

• Profitability of farm banks remained favorable despite weak agricultural loan demand and margin 

compression.4

• Asset quality among farm banks improved in 2021 as loan repayments increased and extensions declined. 

• Rising production costs and supply chain problems that affect the agricultural sector may pose challenges in 2022. 

There were 1,121 farm banks comprising nearly one-quarter of all banks as of fourth quarter 2021. All but 

13 of these banks are also considered community banks by the FDIC’s definition (see Glossary of Terms). In 

fourth quarter 2021, agricultural loans held by all banks totaled $180.2 billion. 

• Community banks hold 69.8 percent ($125.7 billion) of total agricultural loans. 

• Nearly 23 percent of farm banks (5.3 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 the map represent the 256 banks with total agricultural loans above 300 percent of capital. 

Source: FDIC. 

4 Unless otherwise noted, banking data are for farm banks only. 

2022 Risk Review | 19 
20 | 2022 Risk Review 

 

 

 

 

 

 

The agricultural sector had a strong year as 

commodity prices and farm incomes rose, pushing 

farmland values higher. Net farm income increased by 

$23.9 billion (25.1 percent) from 2020 to $119.1 billion 

in 2021, the highest level since 2013 and well above the 

prior 20-year average in nominal and inflation-adjusted 

terms (Chart 14). Higher cash receipts for both crops and 

livestock were partially offset by higher expenses and a 

decline in government payments.5 

Increased demand helped push many commodity prices 

higher in 2021, surpassing pre-pandemic levels. The 

reopening of the economy spurred increased domestic 

demand for agricultural products as consumers resumed 

dining out, schools returned to in-person classes, 

and entertainment venues hosted events. Exports of 

agricultural products also increased, further bolstering 

commodity prices. In inflation-adjusted dollars, total 

agricultural exports in 2021 reached the highest level 

since reporting began in 1967.6 By volume, exports of 

Chart 14 

cattle, corn, and dairy set new record highs in 2021; pork 

reached its second-highest level, only slightly behind 

2020. China remained the leading destination for U.S. 

agricultural exports. In 2021, export volumes to China 

increased by 10.6 percent to a record high.7 

Concerns about drought also contributed to higher 

crop prices. During 2021, a large portion of the western 

United States and pockets of the Midwest experienced 

severe or worse drought conditions for most or all of the 

year.8 Widespread drought led to concerns surrounding 

crop yields and production totals, which lifted corn, 

soybeans, and wheat prices to their highest levels 

since at least 2013. Although the drought contributed 

to higher crop prices, it hampered the recovery for 

cattle and dairy producers who had to contend with 

deteriorating grazing conditions and higher feed costs. 

Higher farm incomes and commodity prices, combined 

with continued low interest rates, contributed to 

In 2021 Net Farm Income Reached Its Highest Level Since 2013 

0 

20 

40 

60 

80 

100 

120 

140 

160 

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021F 

Net Farm Income 

2001–2020 Average 

$ Billions 

Inflation-adjusted 

Source: U.S. Department of Agriculture. 

Note: Data are annual through 2022. Inflation-adjusted data in 2022 dollars. F= USDA forecast data. 

5 In 2021, the USDA forecast that crop and livestock receipts both increased by more than 18 percent, while expenses rose 9.4 percent. Government payments 

are forecast to have declined by 40.6 percent. The decline in government payments was primarily driven by a decline in pandemic-related support, which fell by 

$15.7 billion, or 66.9 percent. See USDA, 2022 Farm Sector Income Forecast, February 04, 2022, https://www.ers.usda.gov/data-products/farm-income-and-wealthstatistics/. 6 The USDA Foreign Agricultural Service reported that total 2021 exports in nominal terms had reached $177 billion, 18 percent above 2020. In volume, exports 

increased by 2.6 percent over 2020. 

7 Export volumes to China in 2021 reached nearly 61 million metric tons and were approximately $33 billion in dollar terms. 

8 Some of the most pronounced drought conditions were in California, Montana, North Dakota, and Wyoming; an average of 55 percent or greater of the land area in 

each of these states was in severe or worse drought throughout 2021. See National Drought Mitigation Center, University of Nebraska-Lincoln, U.S. Drought Monitor, 

https://droughtmonitor.unl.edu/Maps/MapArchive.aspx. 
2022 Risk Review | 21 

 

strong demand for farmland, which helped push 

farmland values higher in 2021.9 In August 2021, the 

U.S. Department of Agriculture (USDA) reported that 

the national average per-acre value of farm real estate 

had increased 7 percent from one year earlier, the 

largest year-over-year increase since 2014. Midwestern 

farmland values generally rose more than the rest of the 

nation. Federal Reserve surveys of agricultural banks 

during fourth quarter 2021 showed farmland values of 

Midwestern states increased as much as 31 percent over 

the prior year.10 

Favorable agriculture conditions helped support 

profitability of farm banks in 2021. Despite margin 

compression and weak agricultural loan demand, 

the median pretax return on assets ratio at farm 

banks improved to 1.30 percent in 2021 compared 

with 1.23 percent in 2020. A majority of farm banks 

reported lower loan loss provisions as the credit outlook 

improved and net interest income and noninterest 

income increased faster than overhead expenses. 

Chart 15 

Strong deposit growth and modest total loan demand 

contributed to a sharp decline in the median loansto-assets ratio among farm banks (Chart 15). In fourth 

quarter 2021, agricultural production loans contracted 

0.03 percent following a 7.6 percent contraction one 

year earlier. The contraction in loans was consistent 

with results from several Federal Reserve Bank surveys 

that indicated widespread declines in the demand for 

non-real estate agricultural loans because of higher farm 

incomes.11 Contraction in non-real estate agricultural 

loans contributed to a decline in the median agricultural 

loan to capital concentration ratio to 213 percent in 

fourth quarter 2021, its lowest level in 20 years. Looking 

ahead, loan demand could get a boost from rising 

agricultural input costs as farmers may need additional 

funding to help with higher operating expenses. 

Asset quality among farm banks strengthened in 2021. 

Agricultural loan past-due rates declined markedly at 

farm banks in 2021 (Chart 16). The median agricultural 

loan past-due and nonaccrual loan (PDNA) ratio 

decreased to 0.08 percent in fourth quarter 2021 from 

0.29 percent a year earlier. Meanwhile, the share of 

Strong Deposit Growth at Farm Banks Outpaced Loan Growth 

50 

55 

60 

65 

70 

75 

0 

2 

4 

6 

8 

10 

12 

14 

16 

2017 2018 2019 2020 2021 

Loans-to-Assets Ratio (Right Axis) 

Deposit Growth (Le ̃ Axis) 

Loan Growth (Le ̃ Axis) 

Median Year-Over-Year Growth 

Percent 

Median Loans-to-Assets Ratio 

Percent 

Source: FDIC. 

Note: Data as of fourth quarter for each year among farm banks. Loans are total loans. 

9 Survey data from Federal Reserve Bank districts, including Chicago, Dallas, Kansas City, Minneapolis, and St. Louis, indicate that farmland interest rates were, on 

average, 100 basis points lower than the average from 2015 to 2019. See Nathan Kauffman and Ty Kreitman, “Farm Real Estate Values Rise Sharply,” Ag Finance Update, 

Federal Reserve Bank of Kansas City, November 23, 2021, https://www.kansascityfed.org/agriculture/agfinance-updates/farm-real-estate-values-rise-sharply/. 10 Cited values are for non-irrigated cropland. 

11 Federal Reserve District Agricultural Credit Surveys for Chicago, Kansas City, and Minneapolis Districts, fourth quarter 2021, https://www.kansascityfed.org/ 

search/?query=Federal%20Reserve%20Ag%20Credit%20Surveys&filter-section=document&sorting=relevant&page-number=1&perpage=10. 
22 | 2022 Risk Review 

 

 

 

 

Chart 16 

Credit Quality Has Improved Markedly at Farm Banks 

Median Share of Farm Banks 

Percent Percent 

0.6 

0.5 

0.4 

0.3 

0.2 

0.1 

0.0 

Agricultural Loan Past-Due Ratios Greater Than 5 Percent (Right Axis) 

Agricultural Loan Past-Due Ratio (Left Axis) 

9 

8 

7 

6 

5 

4 

3 

2 

1 

0 

2014 2015 2016 2017 2018 2019 2020 2021 

Source: FDIC. 

Note: Data as of fourth quarter for each year. 

farm banks reporting agricultural PDNA ratios above 

5 percent declined to 5.4 percent in fourth quarter 2021 

from 7.1 percent one year earlier, the lowest level since 

2016. Charge-off rates remained low. Only 15 percent of 

farm banks reported net agricultural loan charge-offs 

in 2021, a decrease from 23 percent a year earlier. In 

addition, increasing farmland values provided strength 

to farm bank collateral positions. 

Other industry reports also suggest strength among 

agricultural borrowers. According to USDA forecasts, 

farm sector working capital increased in 2021 by 

9 percent to its highest level in the past seven years. In a 

recent industry survey of agricultural lenders, 80 percent 

of respondents expected their agricultural borrowers 

to be profitable in 2021 compared with only 49 percent 

in 2020.12 In addition, Federal Reserve Bank surveys 

indicate agricultural loan repayment rates increased to 

historically high levels in 2021, while agricultural loan 

renewals or extensions declined (Chart 17). 

Lower government payments and rising production 

costs are expected to reduce 2022 net farm income 

despite strong commodity prices. Strong commodity 

prices are forecast to increase total farm sector receipts 

by $29.3 billion in 2022, an increase of 6.8 percent 

from 2021. However, lower government payments and 

higher production costs are forecast to more than offset 

these gains. The USDA’s first forecast of the year shows 

net farm income is expected to decline $5.4 billion 

(4.5 percent) to $113.7 billion in 2022.13 Government 

payments are expected to fall $15.5 billion (57 percent) 

from 2021 because of lower supplemental and ad hoc 

COVID-19 disaster relief assistance. Farmers will likely 

experience higher operating costs for fertilizer, feed, 

fuel, and interest. In aggregate, the USDA projects that 

farm sector production expenses for 2022 will increase 

5.1 percent from the previous year, led by increases in 

fertilizer and interest expenses (Chart 18). This follows a 

9.4 percent increase in 2021 and represents the highest 

level of production expenses in more than a decade. 

Global supply chain problems and transportation issues 

may continue to challenge farm operations in 2022. 

Supply chain disruptions contributed to rising costs 

across the agricultural sector and could continue to 

make it difficult for producers to obtain necessary inputs 

and market their goods in 2022. Export restrictions 

and damage from Hurricane Ida have contributed 

to potential fertilizer shortages for the 2022 season. 

Machinery and parts shortages have made it difficult to 

get new equipment and to repair used equipment. 

12 American Bankers Association and Farmer Mac, Agricultural Lender Survey Results, Fall 2021, https://www.aba.com/news-research/research-analysis/agriculturallender-survey. 13 USDA’s 2022 Farm Sector Income Forecast, https://ers.usda.gov/topics/farm-economy/farm-sector-income-finances/farm-sector-income-forecast/. 
2022 Risk Review | 23 

Chart 17 

Agricultural Credit Conditions Have Improved 

0 

20 

40 

60 

80 

100 

120 

140 

160 

180 

Chicago Kansas City Minneapolis Chicago Kansas City Minneapolis 

Loan Repayment Rates Renewals or Extensions 

Survey Responses 

Index value 

2015 

2021 

Federal Reserve Bank Surveys 

Source: Federal Reserve District Agricultural Credit Surveys. 

Note: Data as of fourth quarter for each year. Survey responses from bankers indicate whether repayment rates 

and renewals or extensions during the current quarter were higher than, lower than, or the same as in the 

year-earlier period. Index values above 100 indicate an increase in repayment rates and renewals or extensions. 

The index numbers are computed by subtracting the percentage of bankers who responded “lower” from the 

percentage who responded “higher” and adding 100. 

Chart 18 

Most Major Agricultural Expenses Are Forecast to Increase in 2022 

Change in Annual Agricultural Expenses from 2021 to 2022 Forecast 

Percent 

15 

10 

5 

0 

-5 

-10 

Fertilizer Interest Feed Labor Fuel/Oil Pesticides Net Rent 

Purchases 

Source: U.S. Department of Agriculture. 

Note: Changes are based on non-inflation-adjusted dollar values. 

Also, ongoing shipping and domestic transportation 

challenges that intensified in 2021 could make it 

challenging for producers to transport or export their 

products in 2022. 

The conflict between Russia and Ukraine has created 

uncertainty about the prospects for wheat and corn 

exports from these two countries in 2022. Ukraine and 

Russia accounted for more than 28 percent of global 

wheat exports and more than 18 percent of global corn 

exports in 2021. Prices for these commodities rose 

sharply in the days immediately following the start of 

the conflict, reaching record highs for wheat and nearrecord highs for corn. Prices are likely to remain elevated 

throughout the planting season. In addition, Russia 

is one of the world’s top producers of fertilizer, and 

the conflict could limit worldwide supply and lead to 

increased costs or limited availability of fertilizer around 

the world. 
24 | 2022 Risk Review 

 

Commercial Real Estate 

• Demand for most CRE property types rebounded in 2021 from the initial setback in 2020. 

• Office markets, particularly large office markets, may experience lasting changes reflecting the COVID-19 

pandemic. 

• CRE loans held by banks reached a record high in fourth quarter 2021, and community banks remain heavily 

involved in lending to this industry. 

• While performance metrics for bank CRE loan portfolios remain favorable, expiration of pandemic-related 

financial assistance and shifts in CRE usage may affect future performance. 

CRE loans held by banks totaled nearly $2.8 trillion as of fourth quarter 2021. 

• Community banks hold 29 percent ($796 billion) of total CRE loans. 

• Concentration in CRE lending remains high; 27 percent of all banks have a concentration of CRE loans 

exceeding 300 percent of capital (tier 1 capital and credit loss reserves for loans and leases) or acquisition, 

development, and construction (ADC) loans exceeding 100 percent of capital. 

• Exposure to CRE lending is the heaviest in banks headquartered in the West and the Northeast, based on 

median concentration levels. 

Regional Exposure to CRE Lending 

Dots on the map represent the 1,302 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. 
2022 Risk Review | 25 

 

Most CRE markets were resilient during the COVID-19 

recession, and market conditions improved with 

economic recovery in 2021. Demand for most property 

types, as measured by space absorbed, rebounded 

from the decline in 2020. Industrial and multifamily 

performed particularly well in 2021 (Chart 19). Strong 

demand during the pandemic has helped absorb 

the sharp increase in supply of industrial space in 

recent years. Demand for industrial space increased 

substantially early in the pandemic, in part to support 

the growth of e-commerce. From first quarter 2020 

through fourth quarter 2021, 728 million square feet of 

industrial space was rented (absorbed), well above the 

421 million square feet rented in the two years before 

the pandemic. 

Demand for multifamily rental units improved 

substantially in 2021. The ratio of absorption of 

multifamily units to total stock grew by more than 

80 percent in 2021 from the 2020 level, helping to push 

the multifamily vacancy rate to the lowest level in 

more than 20 years. Likewise, multifamily rent growth 

Chart 19 

surpassed its average pre-pandemic level and renter 

payment performance largely held up. The multifamily 

sector’s resilience likely reflected various factors. For 

example, prices of single-family homes rose sharply in 

2021, which may have led some potential homebuyers 

to rent instead. In addition, pandemic-related payments 

and aid for renters may have mitigated weakening in 

rental payment performance.14 

The retail and lodging sectors were more severely 

affected by the pandemic, and some subtypes continue 

to struggle. Demand for retail space recovered in 2021 

after declining in 2020. But malls, one of several retail 

subtypes, are still experiencing weak demand.15 Mall 

space saw the quickest rise in vacancy after the onset 

of the pandemic and now has the highest vacancy rate 

among retail property subtypes. The closure of malls 

for several months during the pandemic dealt a blow to 

already-weakened inline stores.16 Mall vacancy finished 

2021 at 8.3 percent, near a multicycle high. In contrast, 

general retail, which accounts for the largest amount 

of retail space in the United States, experienced steady 

Demand for Most Property Types Has Improved From Pandemic Lows 

Net Absorption as a Share of Inventory 

Percent 

5.0 

Multifamily 

O ̃ice 

Dec-16 Dec-17 Dec-18 

Source: CoStar. 

Note: Data are annual through December 2021. 

Dec-19 Dec-20 Dec-21 

-1.0 

0.0 

1.0 

2.0 

3.0 

4.0 Retail 

Industrial 

14 Whitney Airgood-Obrycki, Ben Demers, Solomon Greene, Chris Herbert, Alexander Hermann, David Luberoff, and Sophia Wedeen, “Renters’ Responses to Financial 

Stress During the Pandemic,” Joint Center for Housing Studies of Harvard University, April 2021, https://www.jchs.harvard.edu/sites/default/files/research/files/ 

harvard_jchs_renter_responses_covid_airgood-obrycki_etal_2021.pdf. 15 According to CoStar, there are five major subtypes of retail properties: general, strip center, power center, mall, and neighborhood center. 

16 Commercial real estate consulting company VTS describes inline stores as those that most people would consider smaller stores that fill in the space between the 

larger stores in malls and open-air centers. These stores compensate for the discounted rents provided to anchors and typically pay more per square foot. Inline stores 

range between 1,500 and 5,000 square feet. 
26 | 2022 Risk Review 

 

 

 

 

 

 

 

demand.17 Through 2021, three times as much general 

retail space was absorbed than was delivered. The steady 

demand for general retail space accounts for the overall 

retail sector’s declining vacancy rate, from 5.1 percent at 

the end of 2020 to 4.6 percent at the end of 2021. 

The U.S. hotel occupancy rate dropped sharply during the 

pandemic, and the decline in hotel occupancy reduced 

hotel revenues. Differentiation in the lodging sector 

continues to drive performance. Vaccine availability and 

pent-up demand contributed to a surge in demand for 

leisure travel, which has carried much of the recovery. 

Economy hotel occupancy, which serves as a proxy for 

leisure demand, increased in 2021 and exceeded the 

pre-pandemic level by year-end. In contrast, corporate 

travel has yet to recover fully, which is reflected in weaker 

demand for luxury hotel properties (Chart 20).18 While 

leisure travel accounts for the largest share of the hotel 

industry’s room nights, group and corporate travel 

account for roughly two-thirds of hotel revenues.19 

The pandemic has reduced demand for office space, 

possibly for the long run. At the onset of the pandemic, 

office absorption turned negative for the first time in a 

Chart 20 

decade as commercial office space that was vacated or 

supplied by new construction exceeded that which was 

leased, or absorbed, by commercial tenants. At its worst 

during the pandemic, negative net absorption reached 

0.5 percent of total inventory, twice the low recorded 

during the Great Recession.20 The drop in demand for 

office space contributed to a meaningful increase in 

office vacancy. The office vacancy rate has increased in 

almost two-thirds of U.S. office markets, and in each of 

the nation’s ten largest markets, since the start of the 

pandemic. The overall U.S. office vacancy rate increased 

from 9.7 percent in fourth quarter 2019 to 12.2 percent in 

fourth quarter 2021, an eight-year high. 

The nation’s large office markets have suffered more 

than smaller markets since the pandemic began, with 

larger increases in vacancy rates and slower rent growth 

(Chart 21). The average vacancy rate in the nation’s 

gateway markets (large, typically coastal, markets that 

attract substantial foreign investment) increased from 

9.4 percent in fourth quarter 2019 to 13.0 percent in 

fourth quarter 2021. In contrast, the average vacancy 

rate in the rest of the U.S. markets increased only 

modestly, from 5.6 percent to 6.2 percent, over the same 

Occupancy in Luxury Properties Trails Economy Properties 

Occupancy Rate Index (December 2019 = 100) 

0 

20 

40 

60 

80 

100 

120 

140 

160 

Luxury Economy 

Forecast 

Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 

Source: CoStar. 

Note: Data shown are monthly actuals through December 2021 and monthly forecasts from January 2022 through 

December 2022. 

17 The general retail subtype includes freestanding and independent, nonchain retailers. 

18 CoStar, data as of December 2021. 

19 Bank of America, Lodging Primer, September 11, 2018. 

20 CoStar, fourth quarter 2021 data. 
2022 Risk Review | 27 

 

 

 

 

 

 

 

 

Chart 21 

Large Office Markets Have Suffered More Than Smaller Markets 

0 

2 

4 

6 

8 

10 

12 

14 

4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 

Gateway Markets Non-Gateway Markets 

Vacancy Rate 

Percent 

Source: CoStar. 

Note: Data are quarterly through December 2021. Gateway markets are large, typically coastal, markets that 

attract substantial foreign investment. 

period. Gateway office markets also suffered an outsized 

decline in rental rates as demand for office space fell.21 

Many companies re-evaluated their office space needs 

and expanded remote work during the pandemic. 

Office usage dropped substantially, and the number 

of employees that regularly occupied office buildings 

declined. Several surveys and reports show that a large 

share of companies have or plan to transition to a hybrid 

return-to-office model—a mix of office and remote 

work—rather than a full return to the office, which would 

permanently lower demand for office space. 

Banks reported a record-high level of CRE loans in 

fourth quarter 2021. Banks have experienced year-overyear CRE loan growth for 37 consecutive quarters as they 

continued to grow their CRE loan portfolios amid the 

pandemic. As of fourth quarter 2021, the nation’s banks 

held nearly $2.8 trillion of CRE loans, higher than the prior 

CRE cycle’s peak of $1.9 trillion in fourth quarter 2008. 

Just over 98 percent of banks hold CRE loans, and CRE is 

the largest loan category for almost 49 percent of banks. 

Among CRE loans held by banks, those secured by 

existing nonfarm nonresidential real estate properties, 

including business and industrial properties, hotels, 

churches, and other similar properties, continued 

to comprise the largest segment at $1.6 trillion or 

60 percent of total CRE loans outstanding (Chart 22). 

Multifamily, the next largest segment at $512.6 billion, 

has grown each quarter since early 2011 and in 2021 was 

more than double its 2008 peak. Similar to the nonfarm 

nonresidential portfolio, multifamily growth slowed 

during the first year of the pandemic but recovered 

in the last three quarters of 2021. Bank acquisition, 

development, and construction (ADC) loans were 

$401.1 billion at year-end 2021 but were still less than 

two-thirds the level of bank ADC loans held in 2008.22 

As of fourth quarter 2021, the national median CRE 

loan concentration at banks was 184 percent, up from 

a year earlier (181 percent) but below the 2008 peak 

(214 percent). Banks in the Midwest and South drove 

the year-over-year rise at the national level; their 

median levels reached 107 percent and 208 percent, 

respectively, at year-end 2021. Banks headquartered in 

the West had the highest median level of CRE loans to 

capital, 278 percent, albeit down from 283 percent a year 

earlier. Banks in the Northeast followed at 231 percent, 

which also was down from a year earlier. 

21 CoStar, fourth quarter 2021 data. 

22 While banks do not provide data on CRE sector-specific risk exposures in their quarterly Consolidated Reports of Condition and Income, regulatory examinations and 

CRE data providers reaffirm that banks remain active lenders across CRE sectors. 
28 | 2022 Risk Review 

 

Chart 22 

CRE Loans at Banks Are Growing 

0.0 

0.5 

1.0 

1.5 

2.0 

2.5 

3.0 

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

$ Trillions 

Acquisition, Development, and Construction 

Nonfarm Nonresidential 

Multifamily 

CRE not Secured by Real Estate 

Source: FDIC. 

Note: Data are quarterly from fourth quarter 2008 through fourth quarter 2021. 

CRE loans remained an essential part of community 

bank lending programs. While community banks held 

15 percent of the banking industry’s total loans as of 

fourth quarter 2021, they held 29 percent of its CRE 

loans. Community bank CRE loans rose to $796 billion 

by year-end 2021, 10 percent higher than a year earlier 

and 31 percent higher than their peak volume in the 

prior cycle. Community banks headquartered in rural 

or smaller metropolitan areas held 65 percent of the 

CRE loan volume reported by all banks headquartered 

in those areas. Meanwhile, community banks in larger 

metropolitan areas held only about a quarter of the CRE 

loan volume reported by all banks headquartered in 

those areas. 

The number of community banks with an elevated 

concentration in CRE loans to capital began decreasing 

in 2018 and declined until mid-2021.23 In fourth quarter 

2021, almost 27 percent of community banks held an 

elevated concentration of CRE loans to capital. This was 

the highest share since first quarter 2020 but was almost 

1 percent below the year-end 2017 level and less than 

the prior cycle peak of 37 percent in fourth quarter 2008. 

CRE asset quality remained favorable, supported 

by pandemic-related assistance measures. The 

median CRE loan delinquency rate among banks was 

0.18 percent in fourth quarter 2021, well below the 

3.85 percent peak in first quarter 2010 and below the 

0.45 percent pre-pandemic level at year-end 2019. 

CRE loan noncurrent and charge-off rates in 2021 were 

nominal. Throughout the pandemic, regulators have 

encouraged banks to work prudently with stressed 

borrowers. Accommodated loan volume decreased 

between 2020 and 2021.24 However, traditional metrics 

used for assessing loan performance may be obscured 

by loan accommodations and by the lingering effects of 

pandemic-related federal support programs and other 

assistance measures. 

While the CRE sector has been resilient, the outlook 

for the sector remains uncertain. Some properties 

may experience weakened cash flows, perhaps as a 

result of CRE market and sector changes, and some 

borrowers may face potentially higher interest rates 

and debt servicing costs. Trends that emerged during 

the pandemic, such as remote work, shifts in housing 

preferences, and lifestyle changes, continue to 

complicate lenders’ and regulators’ ability to assess 

asset quality. In the CRE space, banks will continue to 

face intense competition from other banks and nonbank 

lenders, potentially prompting weaker underwriting. 

These factors could adversely affect CRE loan 

performance. 

23 “Elevated concentration” is defined here as CRE loans exceeding 300 percent of capital or ADC loans exceeding 100 percent of capital. 

24 A loan accommodation includes, in general, any agreement to defer one or more payments, make a partial payment, forbear any delinquent amounts, modify a loan 

or contract, or provide other assistance or relief to a borrower who is experiencing a financial challenge. 
2022 Risk Review | 29 

 

Consumer Debt 

• Pandemic-related fiscal support programs boosted personal income in 2021, lowered household debt burdens, 

and supported consumer loan performance. 

• Consumer loan balances at banks grew in 2021, led by auto loans and other non-credit card consumer loans. 

• Asset quality improved, as noncurrent and net charge-off rates declined across all consumer loan types. 

• While performance improved in 2021, consumer loans remain a source of credit risk at banks. 

Consumer loans held by banks totaled $1.9 trillion as of fourth quarter 2021. 

• Community banks hold 3.5 percent ($66 billion) of total banking industry consumer loans. 

• Concentration in the industry remains low. Only 4.5 percent of all banks hold a concentration of consumer 

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

• Sixty-five percent of banks with a concentration of consumer loans are community banks. 

Regional Exposure to Consumer Lending 

Dots on the map represent the 220 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. 
30 | 2022 Risk Review 

 

Government fiscal support continued through much 

of 2021, bolstering household balance sheets and 

lowering consumer debt burdens. The government 

issued two rounds of economic impact payments 

to households in January and March 2021, raising 

household income by 11.9 percent between fourth 

quarter 2020 and first quarter 2021 (Chart 23). Enhanced 

unemployment insurance benefits also continued 

to support household incomes through September 

2021, while the expanded Child Tax Credit augmented 

incomes from July through December 2021.25 As 

of January 2022, these programs had expired, and 

government transfers payments are expected to be less 

of a boost to household income in 2022. 

Strong personal income and low interest rates 

contributed to lower household debt burdens in 

2021 (Chart 24). Before the pandemic, the household 

debt service ratio—the ratio of estimated required 

payments on mortgage and consumer debt to 

disposable personal income—was near record lows. 

The household debt service ratio and the consumer 

debt service ratio, which excludes estimated required 

payments on mortgages, were below 2019 levels as 

debt growth slowed and interest rates remained low. 

Chart 23 

The ratios dipped even lower in the quarters that 

the government issued most of the economic impact 

payments, which temporarily bolstered disposable 

personal income. 

Consumer lending balances at banks increased from 

a year earlier and surpassed the pre-pandemic level 

in fourth quarter 2021. Credit card loans are about 

half of all consumer loans held by banks; auto loans 

and other consumer loans make up the other half. 

Overall consumer loan growth in 2021 was driven by 

auto loans and other non-credit card consumer loans. 

Credit card loans at banks decreased year over year in 

each quarter from second quarter 2020 through second 

quarter 2021 (Chart 25). Despite modest growth in third 

quarter and strong growth in fourth quarter, credit card 

loans remained 7.5 percent below their pre-pandemic 

fourth quarter 2019 level. In contrast, auto loan balances 

increased in 2021 on strong demand for cars, even as 

production shortages at automakers decreased supply 

and drove up prices. Auto loan growth was stronger 

at noncommunity banks than at community banks. In 

fourth quarter 2021, auto loan balances at community 

banks rose just above the pre-pandemic level. 

Government Fiscal Programs Continued to Boost Personal Income in 2021 

Change From January 2020 

Percent 

180 Employee Compensation 

-20 

0 

20 

40 

60 

80 

100 

120 

140 

160 

Government Transfers 

Other Income 

Total Personal Income 

Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 

Source: Bureau of Economic Analysis (Haver Analytics). 

Note: Data are monthly through December 2021. 

25 See Congressional Research Service, “Unemployment Insurance Provisions in the CARES Act,” April 9, 2020, https://crsreports.congress.gov/product/pdf/IF/IF11475, 

for additional information on pandemic-related unemployment insurance programs. See The White House, “The Child Tax Credit,” https://www.whitehouse.gov/childtax-credit, for additional information on the Child Tax Credit. 
2022 Risk Review | 31 

 

Generally tight underwriting standards for consumer 

lending contributed to relatively slow loan growth 

in 2021. While a net share of banks loosened lending 

standards in 2021, banks reported in July that lending 

requirements for most loan types were close to the 

tighter end of the historical range.26 Tighter underwriting 

standards limit the supply of consumer loans, 

dampening loan growth, but could benefit banks by 

reducing the chance that borrowers will be unable to 

repay loans. 

Asset quality at banks improved in 2021 across all 

consumer loan types. Personal income growth, the 

improving labor market, and low debt burdens all 

contributed to improving consumer asset quality. 

Despite increasing modestly in fourth quarter due to 

typical seasonal variations, the share of all types of 

consumer loans that were noncurrent—more than 

90 days delinquent or in nonaccrual status—fell between 

fourth quarter 2020 and fourth quarter 2021 (Chart 26). 

The noncurrent rate on consumer loans fell at both 

Chart 25 

Chart 24 

Consumer Debt Burdens Declined in 2021 From 

the Improved Labor Market and Economic Impact 

Payments 

Debt Service Payments as a Share of Disposable Personal Income 

Percent 

14 

12 

10 

8 

6 

4 Household Debt Service Ratio 

2 Consumer Debt Service Ratio 

0 

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 

Source: Federal Reserve Board (Haver Analytics). 

Note: The household debt service ratio is the ratio of estimated required 

payments on mortgages and consumer debt to disposable personal income. 

The consumer debt service ratio is the ratio of estimated required payments 

on consumer debt to disposable income. Data are quarterly as of fourth 

quarter 2021. 

Credit Cards Remained a Drag on Consumer Loan Growth in First Half 2021 

Year-Over-Year Change 

Percent 

Consumer Loans 

15 Auto Loans 

Credit Card Loans 10 

-15 

Mar-2019 Sep-2019 Mar-2020 Sep-2020 Mar-2021 Sep-2021 

Source: FDIC. 

Note: Data are quarterly through fourth quarter 2021. 

-10 

-5 

0 

5 

Other Consumer Loans 

26 In July 2021, the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices asked about underwriting standards relative to the range over 

which lending standards have varied from 2005 to the present. Despite loosening in 2021, lending standards for prime credit card and auto loans were closer to the 

midpoint of the historical range. 
32 | 2022 Risk Review 

Chart 26 

Noncurrent Rates on Consumer Loans Fell in 2021 

Share of Loans Noncurrent 

Percent Consumer Loans 

1.8 Auto Loans 

0.2 

0.0 

Mar-2019 Sep-2019 Mar-2020 Sep-2020 Mar-2021 Sep-2021 

Source: FDIC. 

Note: Data are quarterly through fourth quarter 2021. 

0.4 

0.6 

0.8 

1.0 

1.2 

1.4 

1.6 Credit Card Loans 

Other Consumer Loans 

community and noncommunity banks, but performance 

differed across loan types. Community banks reported 

lower noncurrent rates than noncommunity banks for 

auto loans and credit card loans and higher noncurrent 

rates for other non-credit card consumer loans.27 Net 

charge-off rates for consumer loans also fell in 2021. 

While asset quality improved in 2021, consumer loans 

remain a source of credit risk at banks. The outlook for 

consumer loans depends on the path and duration of 

the pandemic and its effects on economic activity and 

consumer spending. Adverse effects on the labor market 

and personal income could challenge consumer loan 

repayments. 

27 Community banks hold only 0.25 percent of outstanding credit card loans, so the noncurrent rate should be interpreted with caution. Other consumer loans are loans 

to individuals for household or personal expenses that are not credit card loans or auto loans. 
2022 Risk Review | 33 

 

 

Energy 

• Renewed global oil consumption and limited production contributed to higher oil prices in 2021. 

• The recovery of mining employment in energy-concentrated states has been slow.28 

• Direct bank lending to oil and gas (O&G) firms declined in 2021, but bond issuance increased. 

• Community bank asset quality in energy-concentrated states improved in 2021, in line with other community 

banks. 

Economic exposure to the energy sector is concentrated in eight states: 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. 

Oil prices increased in 2021 as the strong rise in 

global demand for oil exceeded the modest rise 

in production. Global oil consumption, which fell 

8.4 percent in 2020 to 91.9 million barrels per day, 

increased to 97.1 million barrels per day in 2021, a 

gain of 5.7 percent.29 U.S. oil consumption rose sharply 

in 2021 to pre-pandemic levels as economic activity 

strengthened with increased mobility, COVID-19 

vaccines became widely available, and pandemicrelated restrictions eased. Increased demand for oil 

domestically followed global consumption trends. 

In response to rising demand for oil, the Organization 

of the Petroleum Exporting Countries (OPEC) and 

its allies (OPEC+) incrementally boosted production 

in 2021 following record cuts in 2020 when demand 

collapsed because of the pandemic. The increase in oil 

production and rising oil consumption contributed to a 

more balanced global oil market toward the end of the 

year (Chart 27). However, the increase in supply was 

insufficient to prevent prices from rising. One factor that 

limited U.S. oil production was the focus by U.S. oil and 

gas producers to pay down debt instead of spending on 

oil production. West Texas Intermediate (WTI) crude oil 

prices climbed from slightly below $50 per barrel at the 

beginning of 2021 to a high of about $85 per barrel in 

late October, the highest level since 2014. By the end of 

December 2021, prices had receded to around $75 per 

barrel on fears that demand would decline because of 

the Omicron variant. Still, oil prices averaged nearly $68 

a barrel in 2021, the highest level in seven years. 

Despite the advances in oil prices earlier in the year, U.S. 

crude production increased incrementally as the market 

initially drew from excess inventories before ramping 

up production (Chart 28). By year-end 2021, the count of 

active rigs in the United States was substantially higher 

than the year before but 26 percent below the prepandemic level. Many O&G firms also finished out drilled 

but uncompleted wells (DUCs) rather than drilling new 

wells to contain costs and increase production. DUCs 

have declined by nearly one-half the peak level reached 

in June 2020.30 

Despite higher oil prices and drilling activity, mining 

employment in energy-concentrated states has been 

slow to rebound. While energy-concentrated states 

had regained nearly all jobs lost during the pandemic 

by year-end 2021, the mining and logging sector 

remained well below its pre-pandemic employment 

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

accounted for 78 percent of U.S. oil production and 64 percent of natural gas in December 2021. 

29 Short-Term Energy Outlook, U.S. Energy Information Administration, March 2022. 

30 DUCs are oil and natural gas wells that have been drilled but have not yet undergone well completion activities to start producing hydrocarbons. DUCs peaked in June 

2020 and have since fallen 47.6 percent to 4,657 as of December 2021. See U.S. Energy Information Administration, Drilled Productivity Report (DPR), March 14, 2022. 
34 | 2022 Risk Review 

Chart 27 

Increasing Global Demand Helped Reduce 2020’s Unprecedented Inventory 

Build and Rebalanced the Oil Market 

World Liquid Fuels Production and Consumption Balance 

Millions of barrels per day 

80 

85 

90 

95 

100 

105 

World Production 

World Consumption 

Forecast 

2017 2018 2019 2020 2021 2022 2023 

Source: U.S. Energy Information Administration, Short-Term Energy Outlook March 2022. 

Note: Data are quarterly. Actual data are through fourth quarter 2021 and forecast data are through fourth 

quarter 2023. 

Chart 28 

Oil Prices Doubled From October 2020 Through 2021, but U.S. Production 

Was Slower to Respond to Price Signals 

U.S. Crude Oil Production West Texas Intermediate (WTI) Oil Price 

Millions of barrels per day $ per barrel 

0 

10 

20 

30 

40 

50 

60 

70 

80 

90 

9.0 

9.5 

10.0 

10.5 

11.0 

11.5 

12.0 

12.5 

13.0 

13.5 

U.S. Oil Production 

WTI Price 

Texas Freeze Hurricane Ida 

Hurricanes 

Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 

Source: U.S. Energy Information Administration. 

Note: Weekly WTI spot price and U.S. crude oil production are from December 27, 2019, through December 31, 

2021. 

level (Chart 29). The decline in mining and logging 

employment for energy-concentrated states during 

the pandemic was more severe than the nation, 

reflecting the steep decline in oil and gas prices and a 

larger concentration of energy-related jobs. Energyconcentrated states have at least eight times the 

concentration of mining and logging employment 

than the rest of the nation.31 Peak-to-trough during 

the pandemic, mining and logging employment in 

energy-concentrated states fell 27.2 percent compared 

31 Based on Bureau of Labor Statistics data for 2021, the location quotient (LQ)—a metric measuring an area’s share of industry employment—showed energyconcentrated states have an LQ of 4.1 compared with 0.5 for the rest of the nation. 
2022 Risk Review | 35 

with 10.1 percent for the rest of the nation.32 By fourth 

quarter 2021, mining and logging employment was 

22.0 percent below its pre-pandemic level across 

energy-concentrated states compared with 2.5 percent 

below the pre-pandemic level for the rest of the nation. 

The steep decline in the oil and gas industry within 

energy-concentrated states has contributed to a 

slightly weaker overall employment recovery than in 

the rest of the nation. Total nonfarm employment in 

energy-concentrated states grew 10.0 percent between 

second quarter 2020 (the recession’s trough) and fourth 

quarter 2021, compared with 11.3 percent for the rest 

of the nation. The decline in oil and gas jobs, which 

are relatively high paying among industry sectors, and 

reduced capital expenditures in energy states have 

ripple effects across supporting industries. Many lost oil 

and gas industry jobs may not return in the near term 

because of consolidation among O&G firms. Growing 

environmental, social, and governance (ESG) pressures; 

mounting competition from renewables; and continuing 

efforts by employers to reduce energy costs and increase 

Chart 29 

energy efficiency also may affect energy-related 

employment in these states. How bankers and business 

leaders respond to the transition away from carbonbased fossil fuels may become increasingly important in 

communities that are heavily concentrated in fossil fuel 

employment and production. 

Bank lending to the oil and gas industry declined. 

While banks do not identify lending to the oil and gas 

sector on Consolidated Reports of Condition and Income 

(Call Reports), JPMorgan estimates that between March 

2020 and June 2021, total bank lending to the oil and gas 

sector declined 10 percent and loans to the exploration 

and production subsector declined just over 16 percent. 

In most cases, the decline in lending occurred because 

of reductions in borrowing lines; however, some banks 

sold entire portfolios at a sizable loss.33 Asset quality 

concerns across the sector and ESG-related concerns 

contributed to a reduction in direct bank exposure.34 

O&G firms have increasingly turned to bond markets 

and other funding sources. New bond issuance to O&G 

Among Energy-Concentrated States, Total Employment Is Further Along in 

Its Recovery Than the Mining and Logging Sector 

Employment 

Percent change from February 2020 peak 

-21.0 

-0.6 

-25 

-20 

-15 

-10 

-5 

0 

Mining and Logging 

Total Employment 

-30 

Month 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 

Source: Bureau of Labor Statistics. 

Note: Energy-concentrated states are Alaska, Colorado, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, 

and Wyoming. Seasonally adjusted data are monthly through December 2021. 

32 Peaks in mining and logging employment for both energy-concentrated states and the rest of the nation were in first quarter 2020; mining and logging employment in 

energy concentrated states reached their trough in third quarter 2020, while the rest of the nation reached its trough two quarters later in first quarter 2021. 

33 Tarek Hamid, Aaron Rosenthal, and Evan Piascik, “High Yield Energy: Never Let a Good Crisis Go to Waste,” 2022 Outlook for the High-Yield Markets, JPMorgan, 

December 2021. 

34 Bank Call Reports do not report direct energy sector lending; however, the Shared National Credit program evaluates oil and gas credits held by large banks. In 

addition, examiner survey responses conclude few community banks have direct exposure to the energy sector. 
36 | 2022 Risk Review 

 

firms reached $196 billion in 2020, the most since 2014. 

Issuance in 2021 was down slightly at $128 billion but 

still exceeded the pre-pandemic 2019 level. Higher oil 

and gas prices improved profitability and strengthened 

balance sheets of many oil producers, which likely 

contributed to lower default rates on bonds issued by 

the energy sector. The sector’s default rate on high-yield 

bonds dropped sharply to 1.5 percent in 2021 compared 

with 14.0 percent for 2020. Only 20 O&G firms filed for 

bankruptcy protection in 2021, the lowest number in the 

past seven years and only slightly more than half of the 

seven-year average. 

Asset quality improved over the past year for 

community banks in energy-concentrated states. Most 

direct bank lending to O&G firms is concentrated in the 

largest banks, while community bank exposure to the 

sector is primarily indirect from the sector’s influence 

on local economies. In 2021, community banks that 

operated in energy-concentrated markets benefited 

from improved conditions in the energy sector and 

pandemic-related federal support programs, despite 

employment weakness in this sector. 

Chart 30 

Excluding PPP loans, the total past-due loan rate 

for community banks headquartered in energyconcentrated states was 0.78 percent in fourth quarter 

2021, an improvement from the 1.14 percent past-due 

rate one year earlier and only slightly higher than the 

0.68 rate for other community banks. The improvement 

in the past-due rate among energy-concentrated states 

was similar to other states (Chart 30).35 The median C&I 

loan past-due rate (excluding PPP loans) for community 

banks in energy-concentrated states improved to 

0.52 percent in fourth quarter 2021 from 0.80 percent at 

year-end 2020 but remained well above the 0.25 percent 

in non-energy concentrated states. 

Increased geopolitical uncertainty has contributed to 

higher energy prices in early 2022. Russia’s invasion 

into Ukraine raises prospects for a global energy supply 

shock and increased market volatility. The conflict 

could also reshape energy policy and planning. The first 

quarter 2022 price spike in crude oil prices reflected 

supply concerns arising from the conflict that will 

likely affect energy consumption patterns and require 

potentially turbulent global supply adjustments. 

Community Banks in Energy-Concentrated States Have Proven Resilient to 

Extreme Volatility in Oil Prices 

Past-Due Loan Ratio West Texas Intermediate Crude 

Median, percent $ per barrel 

4.0 

3.5 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 

Oil Price Oil States Other States 

Right Axis Le ̃ Axis 

--

120 

100 

80 

60 

40 

20 

0 

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

Sources: FDIC and Energy Information Administration. 

Note: Includes all community banks, as defined by the December 2012 FDIC Community Banking Study. 

Past-due loans exclude Paycheck Protection Program loans. Energy-concentrated states are Alaska, Colorado, 

Louisiana, New Mexico, North Dakota, Oklahoma, Texas, and Wyoming. Quarterly bank data are through fourth 

quarter 2021, and monthly average oil price data are through December 2021. 

35 PPP loans are excluded from past-due ratios to avoid asset quality distortions in commercial and industrial loan portfolios, since PPP loans are forgivable or 

guaranteed by the U.S. government. 
2022 Risk Review | 37 

 

 

 

 

Housing 

• Home price growth set a new record in 2021, driven by strong demand, limited inventory of homes for sale, and 

low mortgage rates. 

• The banking industry reported a slight increase in 1–4 family residential loans in 2021.36 

• Asset quality among bank residential mortgage portfolios remains favorable, helped by government support 

and forbearance programs. 

Residential loans held by banks totaled $2.5 trillion as of fourth quarter 2021. 

• Of the $2.5 trillion in residential loans, community banks hold 17 percent ($426 million). 

• Ten percent of all banks hold a concentration of residential loans, with residential loans above 300 percent 

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

• Roughly 40 percent of community banks reported that residential mortgage loans were the largest lending 

segment by dollar volume within their loan portfolio. 

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

Northeast. 

Regional Exposure to Residential Lending 

Dots on the map represent the 504 banks with total 1–4 residential loans above 300 percent of capital. 

Source: FDIC. 

36 One-to-four family residential loans include total real estate loans secured by 1–4 residential properties. 
38 | 2022 Risk Review 

 

 

 

 

 

 

 

 

Home prices increased sharply in 2021, setting a record 

for growth amid strong demand, limited inventory for 

sale, and low mortgage rates.37 Home price appreciation 

accelerated in 2021 from highs reached in 2020. In the 

year ending fourth quarter 2021, home prices nationally 

rose by 17.5 percent, well above the 11.1 percent rate of 

growth in the year ending fourth quarter 2020 and just 

below the record 18.6 percent growth rate in the year 

ending third quarter 2021. National price growth in 2021 

also far exceeded the prior cyclical peak of 10.6 percent 

in 2005. Home price growth rates in 2021 were highest in 

the West and the South (Chart 31). Arizona, Utah, Idaho, 

Florida, and Tennessee led annual home price increases 

through fourth quarter 2021, with year-over-year 

increases of about 24 percent or more. Housing markets 

in these areas benefited from strong in-migration as 

Chart 31 

prospective home buyers continued to desire more 

space in comparatively less-costly housing markets.38 

Louisiana, North Dakota, and Maryland, states with net 

out-migration during the pandemic, had the lowest 

home appreciation rates in 2021.39 

Record price appreciation nationwide reflects strong 

demand for homes and limited inventory of homes 

for sale. Trends such as increased remote work 

opportunities and shifts in housing preferences that 

emerged at the start of the pandemic continued in 2021, 

including a higher share of millennial home purchase 

mortgage applications.40 Record levels of investor 

purchases also contributed to strong demand for singlefamily homes in 2021, leaving fewer homes available 

for owner-occupant purchases.41 Investors continued 

Home Price Growth Reached a New Peak in 2021 

House Price Index 

-20 

-15 

-10 

-5 

0 

5 

10 

15 

20 

25 Recession 

Midwest 

Northeast 

South 

West 

Year-over-year percent change 

U.S. 

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 

Sources: Federal Housing Finance Agency, Moody’s, National Bureau of Economic Research (Haver Analytics). 

Note: Data are quarterly seasonally adjusted purchase-only house price index figures through fourth quarter 

2021. 

37 Unless otherwise noted, all data in this paragraph are from the Federal Housing Finance Agency seasonally adjusted purchase-only house price index data beginning 

in 1991 through fourth quarter 2021; record house price growth reached in the year ending third quarter 2021. Growth in home prices is calculated on an annual basis 

unless otherwise noted. 

38 Census Bureau, migration data through the first half of 2021. 

39 Federal Housing Finance Agency, seasonally adjusted purchase-only house price index through fourth quarter 2021. Census Bureau, population and migration 

data through the first half of 2021. National Association of Realtors, Bureau of Economic Analysis, Census Bureau, Moody’s Analytics, housing affordability index data 

through fourth quarter 2021. While price growth was at or above the national level in Hawaii and California, the states with the lowest affordability, these two states had 

among the largest outflows of population as residents moved to comparatively more affordable locations. 

40 Archana Pradhan, “Millennial Homebuyers Dominate in High-Tech and Midwest Metros,” CoreLogic, October 4, 2021. Millennials benefited from increased remote 

work and accounted for 51 percent of home purchase mortgage applications in 2021, up from 46 percent in 2019. 

41 Dana Anderson and Sheharyar Bokhari, “Real Estate Investors Are Buying a Record Share of U.S. Homes,” Redfin, February 16, 2022. Investors purchased a record 

18.4 percent of U.S. homes in fourth quarter 2021, well above the level of about 10 percent reached during the housing boom leading up to the Great Recession. By 

volume, the number of homes purchased by investors reached a record in third quarter 2021. Redfin data are subject to revision and cover the 40 most populous U.S. 

metro areas where sale details are disclosed, with data beginning in first quarter 2000. 
2022 Risk Review | 39 

 

 

to favor low-priced homes but increasingly purchased 

homes in middle and higher-priced segments as well.42 

While demand for homes remained strong during 2021, 

the inventory of existing homes for sale remained near 

historic lows, and well below the six-month level of 

supply that is indicative of a balanced market.43 As of 

fourth quarter 2021, the months’ supply of existing 

homes for sale was two months, slightly higher than 

earlier in the year but below the three-month level going 

into the pandemic (Chart 32).44 Amid the low supply of 

existing homes for sale, new construction resumed in 

2021 after dipping slightly at the start of the pandemic 

in 2020. As of fourth quarter 2021, starts were more than 

20 percent above the pre-pandemic level.45 Despite 

growth, new construction levels may be insufficient to 

meet demand. Supply chain issues and higher costs of 

land, labor, and lumber are hampering the ability of 

builders to construct additional housing.46 

Chart 32 

The banking industry reported a slight increase in 

1–4 family residential loans in 2021. Despite strong 

home sales, bank mortgage balances grew modestly 

in 2021. As of fourth quarter 2021, banks reported 

1–4 family residential loans of $2.5 trillion, a 0.5 percent 

increase from one year earlier but 0.8 percent lower than 

the fourth quarter 2019 pre-pandemic level. Increased 

competition from nonbank lenders and substantial 

purchases by all-cash investors contributed to muted 

growth among banks. 

Nationally, banks reported a median concentration of 

1–4 family mortgages to capital of 122 percent in fourth 

quarter 2021, slightly above the previous quarter but 

near the lowest level since data reporting began in 1984. 

Slightly higher holdings of residential mortgage loans 

and lower aggregate capital levels contributed to the 

quarterly increase but were coupled with the longerterm aggregate trend of residential lending increasingly 

moving from banks to nonbanks. Community banks 

reported a median ratio of 1–4 family mortgages to 

Inventory of Existing Homes Remains Low Despite Construction Growth 

Single-Family Housing Starts Existing Single-Family Houses for Sale 

Share of housing stock, percent Months of supply 

0.5 

0.4 

0.3 

0.2 

0.1 

0.0 

Balanced Supply of Homes 

for Sale = 6 Months 

Recession 14 

Housing Starts (Le ̃ Axis) 

Existing Houses for Sale (Right Axis) 12 

10 

8 

6 

4 

2 

0 

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 

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

Analytics). 

Note: Data are quarterly figures through fourth quarter 2021. 

42 Anderson and Bokhari, February 16, 2022. 

43 Joint Center for Housing Studies of Harvard University, “The State of the Nation’s Housing 2021,” https://www.jchs.harvard.edu/sites/default/files/reports/files/ 

Harvard_JCHS_State_Nations_Housing_2021.pdf. 44 National Association of Realtors, existing single-family homes for sale through fourth quarter 2021. Census Bureau, new single-family homes for sale through fourth 

quarter 2021. Existing homes accounted for about two-thirds of single-family homes for sale in fourth quarter 2021, down from nearly 80 percent pre-pandemic. 

45 Census Bureau, single-family home starts through fourth quarter 2021. 

46 The Economist, “House Party,” January 8, 2022. 
40 | 2022 Risk Review 

 

 

 

 

 

capital of 125 percent in fourth quarter 2021, down from 

one year earlier and below the 2009 peak of 164 percent. 

The banking industry reported increased holdings 

of traditionally higher-risk 1–4 family residential 

construction loans, which rose to nearly $88 billion 

in fourth quarter 2021, a 14 percent increase from 

one year earlier. This was the highest balance since 

2010, following the Great Recession. Community 

banks increased 1–4 family residential construction 

loans by 17 percent year over year in 2021 compared 

with 11 percent by noncommunity banks. In line with 

regional single-family home starts, community banks in 

the South reported the largest year-over-year increase 

and balance of 1–4 family construction loans, while 

community banks in the Northeast reported the smallest 

increase (Chart 33). The share of banks nationwide with 

a high concentration of typically higher-risk 1–4 family 

residential construction loans continued to decline from 

the Great Recession peak, falling to 5.2 percent in fourth 

quarter 2021 compared with nearly 14 percent at the 

end of 2008.47 

Chart 33 

The banking industry reported favorable mortgage 

asset quality in 2021. As of fourth quarter 2021, 

banks reported an aggregate 1–4 family residential 

loan past-due rate of 2.7 percent, down from one year 

earlier and well below the peak of 10.6 percent in 2010. 

Moreover, nearly half of all banks reported a 1–4 family 

past-due rate below 1 percent, an improvement from 

33 percent of banks reporting this past-due rate level 

in 2019 (Chart 34). The noncurrent rate on 1–4 family 

mortgages, mortgages that are more than 90 days 

past due, also declined from a year earlier.48 Excluding 

Government National Mortgage Association (GNMA) 

noncurrent balances, the industry noncurrent rate for 

1–4 family mortgage loans declined from 1.57 percent 

to 1.37 percent.49 Community banks reported a lower 

noncurrent rate excluding GNMA balances (0.6 percent) 

compared with noncommunity banks (1.5 percent). 

While favorable housing market conditions in 2021 

supported mortgage asset quality, headwinds may 

challenge the sector’s momentum. Asset quality 

measures for residential mortgage loans held by 

banks remained favorable at year-end 2021. The share 

of mortgages in foreclosure also declined in 2021 to 

One-to-Four Family Residential Construction Loans for Community Banks 

Remain Below Levels Reported During the Last Housing Cycle 

0 

10 

20 

30 

40 

50 

60 

70 

80 

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

Midwest Northeast South West 

1–4 Family Residential Construction Loans 

$ Billions 

Source: FDIC. 

Note: Quarterly data for community banks, first quarter 2008 through fourth quarter 2021. 

47 High concentration is defined as 1–4 family construction loans at 50 percent or more to capital. 

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

49 Nearly 60 percent of the decline was due to the lower rebooked GNMA noncurrent balances, which fell 27 percent from year-earlier levels. 
2022 Risk Review | 41 

 

 

 

Chart 34 

Mortgage Credit Quality Has Improved Among Insured Institutions Across 

the Nation 

0 

20 

40 

60 

80 

100 

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

0 to 1 Percent 1 to 3 Percent 3 to 5 Percent > 5 Percent 

Share of Banks Within Each 1–4 Family Residential Past-Due Rate Bucket 

Percent 

Source: FDIC. 

Note: Data as of fourth quarter each year. 

0.4 percent in fourth quarter 2021, the lowest level since 

1981.50 Underwriting of residential mortgages remained 

disciplined as the share of all mortgages originated to 

borrowers with high credit scores remained at a high 

level.51 Strong gains in home prices also contributed 

to the continued decline in the share of underwater 

mortgages to the lowest level since 2009 and 

contributed to meaningful gains in homeowner equity.52 

The share of mortgages in pandemic-related forbearance 

programs declined to 1.41 percent at year-end 2021 after 

peaking at 8.55 percent in June 2020.53 

While industry estimates suggest home prices will 

continue to rise in 2022, albeit at a lower rate than in 

2021, several headwinds may emerge.54 Higher home 

prices have made homes less affordable, particularly 

for first-time buyers. A rise in mortgage rates from 2021 

near record lows may mute housing demand and affect 

the affordability of homes, particularly among first-time 

buyers. In addition, changes in economic conditions, the 

end of various pandemic-related support programs, and 

the resolution of mortgages no longer in forbearance 

could contribute to deterioration in mortgage asset 

quality from lows reached during the pandemic. 

50 Mortgage Bankers Association. 

51 New York Fed Consumer Credit Panel/Equifax. 

52 CoreLogic, “Homeowner Equity Insights,” December 9, 2021. 

53 Mortgage Bankers Association, “Share of Mortgage Loans in Forbearance Decreases to 1.41 percent in December 2021,” January 18, 2022; “Share of Mortgage Loans in 

Forbearance Increases to 8.55 percent,” June 15, 2020. 

54 On December 2, 2021, CoreLogic’s 2022 Housing Outlook forecasted an annual home price of increase 6 percent in 2022 compared with 15 percent in 2021. Freddie 

Mac’s January 2022 Economic and Housing Research Forecast Snapshot indicates annual home price growth of 6.2 percent in 2022 compared with 15.9 percent in 2021. 
42 | 2022 Risk Review 

Leveraged Lending and Corporate Debt 

• Conditions in corporate debt markets improved in 2021, and corporate debt levels continued to grow. 

• Low borrowing costs drove record issuance of lower-rated high-yield corporate bonds, leveraged loans, and 

collateralized loan obligations (CLOs). 

• Corporate borrowers face continuing challenges from adverse market developments including potentially 

higher interest rates. 

• Banks have direct and indirect exposure to corporate debt markets. 

Corporate credit conditions improved in 2021. 

Corporations reported strong profits and had ample 

access to credit, which contributed to a decline in 

corporate defaults. Corporate profits jumped in 2021 

as the post-pandemic economic recovery continued.55 

Higher profits and accommodative borrowing 

conditions allowed companies to take on more lowinterest debt and refinance existing debt. On net, bank 

lending standards eased throughout 2021 for C&I 

loans.56 Leveraged loan prices recovered from a drop 

in 2020.57 Corporate bond spreads declined in early 

2021 and stabilized at pre-pandemic levels through 

year-end (Chart 35).58 Default rates of leveraged loans 

Chart 35 

and corporate bond issuers have declined since 

the pandemic peak in third quarter 2020 (Chart 36). 

However, continuing challenges from the pandemic 

and high levels of debt could cause defaults to increase, 

particularly for corporate borrowers in vulnerable 

sectors such as energy and hospitality. 

Corporate debt reached an all-time high in 2021 

as borrowing costs declined to record lows, but 

measures of debt relative to GDP and corporate profits 

declined.59 Following the market turmoil in March 

2020 and subsequent actions by the Federal Reserve, 

corporate debt markets stabilized in the second half of 

Corporate Bond Spreads Stabilized at Pre-Pandemic Levels 

Corporate Bond Spread 

Percent 

25 

0 

5 

10 

15 

20 Investment Grade 

High Yield 

2000 2003 2006 2009 2012 2015 2018 2021 

Source: ICE Data Services, LLC (Federal Reserve Economic Data). 

Note: Spreads are calculated between an option adjusted index of bonds in a given rating category and a spot 

Treasury curve. 

55 Bureau of Economic Analysis. 

56 Board of Governors of the Federal Reserve System, Senior Loan Officer Opinion Survey. 

57 S&P LCD. 

58 ICE Data Indices, LLC. 

59 Board of Governors of the Federal Reserve System, Financial Accounts of the United States, and ICE Data Indices, LLC. 
2022 Risk Review | 43 

Chart 36 

Corporate Debt Default Rates Declined in 2021 

Default Rate 

Percent 

0 

2 

4 

6 

8 

10 

12 

14 

Leveraged Loan Default Rate 

U.S. High-Yield Default Rate 

2000 2003 2006 2009 2012 2015 2018 2021 

Sources: S&P Leveraged Commentary and Data; S&P Capital IQ. 

Note: Default rates are lagging 12-month rates. Default rates are measured by amount. 

Chart 37 

Nonfinancial Corporate Debt Measures Declined as the Economy Recovered 

Corporate Debt-to-GDP Ratio Corporate Debt-to-Profit Ratio 

Percent Percent 

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

20 

0.0 

0.1 

0.2 

0.3 

0.4 

0.5 

0.6 

0.7 

Nonfinancial Corporate Debt-to-GDP (Le ̃ Axis) 

Nonfinancial Corporate Debt-to-Profit (Right Axis) 

2000 2003 2006 2009 2012 2015 2018 2021 

Sources: Board of Governors of the Federal Reserve System; Bureau of Economic Analysis (Haver Analytics). 

Note: Data are quarterly figures through third quarter 2021. 

2020 and early 2021. Fueled by ample access to credit 

and historically low borrowing costs, corporate debt 

levels rose further in 2021. While the recovery in GDP 

pulled down the corporate debt-to-GDP ratio from the 

all-time high reached in 2020, this ratio remains above 

pre-pandemic levels (Chart 37). Similarly, corporate 

leverage, or debt as a share of profit, declined to prepandemic levels as profits rose in 2021. 

Total corporate bond issuance slowed in 2021 despite 

growth in the lowest-rated segment of the bond 

market.60 The record-setting pace of investment-grade 

corporate bond issuance in the second half of 2020 

slowed slightly in 2021 but remained high compared 

to historical levels. At the same time, increased 

investor risk appetite and record-low borrowing costs 

contributed to the rise in high-yield bond issuance, 

which reached a record high $485 billion in 2021, up 

60 Securities Industry and Financial Markets Association. 
44 | 2022 Risk Review 

 

 

15 percent from a year earlier (Chart 38). Companies 

primarily used this cash to meet refinancing needs and 

finance mergers and acquisitions.61 

Leveraged loan issuance jumped to a historic high 

as investor demand for yield rose. Leveraged loan 

issuance spiked to a record high in 2021, exceeding the 

previous high by 22 percent (Chart 39). Issuance had 

declined for three consecutive years before 2021. New 

Chart 38 

issuance was primarily driven by a spike in investor 

demand, particularly from CLOs, which account for most 

leveraged loan funding. CLO issuance also hit a record 

high in 2021, nearly doubling total issuance in 2020. On 

the supply side, record high financing related to mergers 

and acquisitions drove the leveraged loan market.62 

As issuance spiked, leveraged loans continued to grow 

riskier. Over the past decade, the volume of leveraged 

High-Yield Corporate Debt Issuance Reached a Record High in 2021 

$ Billions 

0 

200 

400 

600 

800 

1,000 

1,200 

1,400 

1,600 

1,800 

2,000 

Investment Grade 

High Yield 

2000 2003 2006 2009 2012 2015 2018 2021 

Source: Securities Industry and Financial Markets Association. 

Chart 39 

Leveraged Loan Issuance Jumped to a Record High in 2021, and the Share 

of Loans Lacking Lender Protections Continued to Rise 

Leveraged Loan Issuance Cov-Lite Share of Leveraged Loans 

$ Billions Percent 

0 

20 

40 

60 

80 

100 

0 

100 

200 

300 

400 

500 

600 

700 

800 

900 

Leveraged Loan Issuance (Le ̃ Axis) 

Cov-Lite Percentage (Right Axis) 

2000 2003 2006 2009 2012 2015 2018 2021 

Source: S&P Leveraged Commentary and Data. 

61 S&P Leveraged Commentary and Data (S&P LCD). 

62 S&P LCD. 
2022 Risk Review | 45 

 

loans without typical lender protections, known as 

maintenance covenants, has increased. These “cov-lite” 

loans accounted for 92 percent of all leveraged loans 

issued in 2021.63 Leverage loan issuance has also risen to 

all-time highs.64 While U.S. banks arrange and originate 

most of these loans, U.S. bank holdings account for only 

8.1 percent of the market.65 

Banks remain exposed to risks in corporate debt 

markets both directly and indirectly. Banks have direct 

risk to corporate debt markets through loans and lines of 

credit to corporations, CLO holdings, and participation 

in the arranging of leveraged loans and corporate bonds. 

However, potential stress in the corporate bond market 

would have a limited direct impact on bank credit risk, 

as banks do not hold a significant amount of corporate 

bonds.66 While U.S. bank holdings of leveraged loans 

are also limited, banks are the primary arranger and 

originator of these loans. As interest rates rise, a decline 

in leveraged loan issuance would mean a loss of loan 

origination fees and income for banks. 

Banks are also exposed to leveraged loans through 

holdings of CLOs. CLO issuance and bank holdings of 

CLOs both jumped in 2021 (Chart 40). In fourth quarter 

2021, banks held more than $152 billion in CLOs, up 

from $101 billion a year earlier.67 While banks have 

traditionally held the highest-rated CLO tranches, these 

holdings expose the banking system to disruption in the 

underlying leveraged loan market.68 

Banks have indirect exposure to corporate debt, 

including lending to nonbank financial firms, 

participation in derivatives markets, and through 

macroeconomic effects such as slowing growth or 

rising unemployment. These factors could affect the 

performance of other bank loans such as commercial 

and residential mortgages and C&I loans. 

Strong bank capital and liquidity may mitigate risks 

to the banking system from corporate debt markets. 

Banks are better positioned to withstand shocks than 

before the Great Recession, as capital levels are higher. 

Reliance on short-term funding has also declined as 

deposit funding rose strongly in 2021.69 Banks with 

high loan concentrations to companies in vulnerable 

industries could face elevated credit losses as these 

industries continue to be adversely affected by the 

pandemic and potentially long-term changes in 

consumer behavior. 

Chart 40 

U.S. Bank Collateralized Loan Obligation Holdings 

Jumped Higher in 2021 

0 

20 

40 

60 

80 

100 

120 

140 

160 

180 

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 

Bank CLO Holdings 

$ Billions 

Source: FDIC. 

Note: The information is reported only among insured depository institutions 

with at least $10 billion in assets, though this threshold has changed 

over time. The information may also include some assets other than CLO 

holdings. 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. 

63 S&P LCD. 

64 Leverage is measured as debt/earnings before interest, taxes, depreciation, and amortization and is higher than any point since at least 2003 according to S&P LCD. 

Actual leverage may be higher than reported leverage, as earnings are routinely adjusted through earnings “add-backs” to increase projected earnings used to calculate 

leverage ratios. 

65 S&P LCD. 

66 FDIC. 

67 FDIC, 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. 

68 Board of Governors of the Federal Reserve System. 

69 FDIC. 
46 | 2022 Risk Review 

 

 

Nonbank Lending 

• Loans to nonbank financial institutions reached a record high in 2021. 

• Exposure to nonbank lending is primarily in the largest banks. 

• Bank lending to nonbank financial institutions exposes the banking industry to potential stress in other parts 

of the financial system. 

Banks remained an important source of lending to 

nonbanks in 2021. Banks held $704 billion in funded 

loan commitments to nonbank financial institutions in 

fourth quarter 2021, a record high since data collection 

began in 2010 (Chart 41).70 Year-over-year growth in 

nonbank financial institution lending in the fourth 

quarter was more than six times faster than total loan 

growth over the same period and outpaced growth in 

all other major loan portfolios in fourth quarter 2021 

(Chart 42). 

Banks provide credit-line commitments to nonbank 

financial institutions including investment firms, 

financial vehicles, nonbank real estate lenders, 

transaction processors, and other entities. Nonbank 

Chart 41 

financial institutions rely on banks as a key source of 

liquidity for day-to-day operations and in times of stress, 

such as periods of heightened investor redemptions 

or disruptions in the short-term funding markets. 

This was evident at the onset of the pandemic when 

funded commitments from banks to nonbanks rose 

in first quarter 2020 to 5.3 percent of total loans from 

4.7 percent in the prior quarter. By fourth quarter 2021, 

funded loans to nonbank financial institutions as a 

percentage of total loans had reached 6.3 percent. 

Lending to nonbanks is concentrated among the 

largest banks. Global systemically important banks 

(GSIBs) reported 32.7 percent growth in funded nonbank 

financial institution balances in 2021.71 Funded nonbank 

Fully Funded Bank Lending to Nonbank Financial Institutions Exceeded 

Early Pandemic Highs 

0 

2 

4 

6 

8 

10 

12 

14 

0 

50 

100 

150 

200 

250 

300 

350 

400 

450 

500 

550 

600 

650 

700 

750 

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

Community Bank Loans to Nonbanks (Le ̃ Axis) 

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

GSIB Loans to Nonbanks (Le ̃ Axis) 

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

Loans to Nonbank Financial Institutions 

$ Billions 

Share of Banks With Loans to Nonbanks 

Percent 

Source: FDIC. 

Note: Quarterly data through fourth quarter 2021. Global systemically important banks (GSIBs) introduced in 

the fourth quarter of 2011. 

70 Loans to nonbank financial institutions were first reported on Call Reports in first quarter 2010. 

71 The eight U.S. GSIBs are Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corporation, and Wells 

Fargo. 
2022 Risk Review | 47 

Chart 42 

Growth in Lending to Nonbank Financial Institutions Has Outpaced Growth 

in Other Major Loan Categories 

Commercial and Industrial 

Annual Loan Growth 1–4 Family Residential 

Percent Agriculture 

Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 

Source: FDIC. 

Note: Commercial Real Estate (CRE) includes loans on nonfarm nonresidential properties, loans on multifamily 

properties, construction and development loans, and CRE loans not secured by real estate. 

18.1 

1.4 

17.5 17.5 

21.5 

-15 

-10 

-5 

0 

5 

10 

15 

20 

25 

30 

35 Commercial Real Estate 

Consumer 

Funded Loans to Nonbank Financial Institutions 

Total Loans 

financial institution loan balances were 11.6 percent 

of their total loan portfolios at year-end 2021, up from 

8.0 percent at year-end 2019. GSIBs issue term loans, 

asset-based loans, and other facilities to nonbanks 

in addition to credit-line commitments. While GSIBs 

lend to a wide variety of nonbank entities, their largest 

commitments tend to be to investment firms and 

financial vehicles. 

Community banks also lend to nonbank entities. Loan 

commitments by community banks to nonbank lenders 

remains limited. Less than 10 percent of community 

banks reported funded commitments to nonbanks 

in 2021, and these loans represent only 1.2 percent 

of total community bank lending. While confined to a 

small portion of community banks, loans to nonbanks 

increased by 7.4 percent in 2021. Most lending to 

nonbank financial institutions by community banks is 

through warehouse lines of credit to nonbank mortgage 

lenders. Nonbank mortgage companies have been 

expanding their share of the mortgage origination 

market in recent years and have been increasing their 

need for bank funding. Many rely on short-term funding, 

including warehouse lines from banks, and have limited 

loss-absorbing capacity in the face of adverse economic 

shocks. 

Bank lending to nonbanks exposes the banking 

industry to potential stress in other parts of the 

financial system. Risks from nonbanks can be 

transferred to banks both directly and indirectly. For 

example, disruption to nonbank mortgage companies 

could affect bank servicing operations, especially for 

nonperforming loans, and pose risks to banks that 

extend credit-line commitments to them. The acute 

financial market stress in March 2020 highlighted 

nonbanks’ reliance on bank funding to manage asset 

liquidation pressures and liquidity mismatches among 

nonbank financial intermediaries such as hedge funds. 

These entities relied on credit-line commitments 

from banks as short-term borrowing sources became 

unavailable, exposing banks to indirect risk of financial 

stress in other parts of the broader financial system. 

Because of the direct and indirect risk inherent in these 

loans, banks may be vulnerable to distress at nonbank 

financial institutions. 
48 | 2022 Risk Review 

 

 

 

 

 

 

 

Small Business Lending 

• Consumer spending rebounded in 2021, supporting small business conditions. 

• Business loans increased after the PPP ended, supporting new business formation and the re-opening of 

existing small businesses. 

• Credit performance for small business lending remained strong despite the pandemic. 

• Despite the improvements in small business conditions, risks remain and may adversely affect banks. 

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

• In over 40 percent of banks, small business loans are the majority of their total commercial and industrial 

loans. 

Regional Exposure to Small Business Lending 

Dots on the map represent the 2,050 banks with small business loans above 75 percent of total 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. 

Strong consumer spending has supported small 

businesses. In the early months of the pandemic, 

consumers reduced spending and increased savings. The 

consumer savings rate jumped from a monthly average 

of 7.5 percent in 2019 to 33.7 percent in April 2020. Over 

time, however, the savings rate dropped to 13.7 percent 

in fourth quarter 2020 and to 7.4 percent in fourth quarter 

2021 as consumers resumed spending and slowed 

savings. Personal consumption expenditures (PCE) 

increased in 2021 after a sharp year-over-year decline 

of 3.8 percent in 2020. Durable goods expenditures 

rose 7.7 percent in 2020 and more than 27 percent 

since 2019, as many consumers purchased home 

improvement products and recreational items during 

the pandemic. Durable goods drove the improvement in 

personal consumption, increasing its share of PCE from 

13.3 percent in 2019 to 16.3 percent in 2021. 

Small businesses have reaped the benefit of the increase 

in consumption. Based on responses to NerdWallet’s 

August 2021 survey conducted by Harris Poll, slightly 

more than half of consumer respondents indicated that 
2022 Risk Review | 49 

 

 

 

they made concerted efforts to shop small and local 

during the pandemic and 40 percent indicated that they 

are continuing these habits as the economy recovers.72 

Commercial bankruptcy filings declined and new 

business formations increased. Despite concerns that 

small businesses would fail in large numbers during the 

pandemic, that temporarily closed businesses would 

never reopen, and that potential business owners would 

be wary of opening a business during a pandemic, 

none of these concerns were realized. Total commercial 

bankruptcies were down 37 percent between 2019 and 

2021, with Chapter 7 bankruptcies down more than 

38 percent and Chapter 11 filings down over 32 percent 

(Table 1).73 While Chapter 11 bankruptcies rose in 2020 

from pre-pandemic levels, the number of business 

restructurings dropped almost 50 percent in 2021 and 

were below the 2019 level. Some small businesses may 

have benefited from the PPP, using funds to keep their 

business operating during the pandemic and avoid 

bankruptcy.74 

Businesses also continued to re-open in 2021. According 

to Yelp Economic Average, 85 percent of businesses 

that closed temporarily between March 2020 and 

September 2021 have reopened, suggesting that many 

Table 1 

small businesses adapted their operations in response 

to the pandemic (for example, offering curbside delivery, 

online shopping, and outdoor dining).75 The data 

also show that consumer demand for hospitality and 

leisure activities, which were hurt by early pandemic 

restrictions, has been rising.76 

New small businesses also have been forming and 

opening. According to business formation data from 

the U.S. Census Bureau, new business applications 

rose in mid-2020 and remained at an elevated level 

through 2021 (Chart 43). Business applications increased 

53 percent between 2019 and 2021. The largest growth 

was in applications for non-high propensity businesses 

(commonly known as sole proprietorships), which 

increased 63 percent (almost 1.4 million applications). 

Applications for high propensity businesses—or 

businesses that employ others—grew 37 percent (almost 

480,000 applications). These analyses are supported by 

the amount of PPP loans originated by banks and the 

return in business lending after the PPP ended in May 

2021. 

Bank lending to small businesses declined in 2021 

as the PPP ended, but non-PPP business lending 

grew. PPP loans accounted for much of the increase in 

Commercial Bankruptcies Continue to Decline and Are One-Third Less Than 2019 Filings 

Type of 

Bankruptcy Filing 

(Commercial Only) 

2019 Filings 

(Number)

 2020 Filings 

(Number) 

2021 Filings 

(Number) 

Change 

Between 2020 

and 2021 

(Percent) 

Change 

Between 2019 

and 2021 

(Percent) 

Chapter 7 Filings 22,834 19,226 14,145 (26.4) (38.1) 

Chapter 11 Filings 5,519 7,129 3,724 (47.8) (32.5) 

Total Filings 28,353 26,355 17,869 (32.2) (37.0) 

Source: American Bankruptcy Institute. 

72 Elizabeth Renter, “Survey: Pandemic Shoppers a Lifeline for Small Businesses,” September 21, 2021, https://www.nerdwallet.com/article/small-business/ 

pandemic-small-business. 73 Chapter 11 bankruptcy allows a business to reorganize, develop a plan to repay creditors, and keep its assets so that the business may remain open. See 11 U.S.C §§ 

1101 to 1195. Chapter 7 bankruptcy allows a business to liquidate all assets to repay creditors and cease operations. See 11 U.S.C. §§ 701 to 784; see also 

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics. 74 The Paycheck Protection Program provided Small Business Administration-guaranteed funds to small businesses to keep employees on the payroll and to cover basic 

expenses such as mortgage interest, utilities and rent. The program ran from March 27, 2020, through May 31, 2021. See U.S. Small Business Administration, 

https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program/first-draw-ppp-loan#section-header-2. 75 Yelp Economic Average, Q3 2021 Report, October 2021, https://www.yelpeconomicaverage.com/yea-q3-2021.html. 76 Yelp Economic Average measures consumer interest through viewing business pages, posting photos, and posting reviews. 
50 | 2022 Risk Review 

 

 

 

 

 

 

 

 

business loans in 2020. C&I loans rose 10.6 percent to 

$2.4 trillion in 2020. The PPP ended in May 2021, after 

which no new PPP loans were originated. Through much 

of 2021, PPP loan balances were paid off or forgiven. 

Total PPP loan balances declined by almost $312 billion 

(76.4 percent) from fourth quarter 2020 to fourth 

quarter 2021; community banks and noncommunity 

banks reported similar rates of decline in PPP loans. 

During the same period, C&I loans declined by almost 

$127 billion (5.2 percent).77 The decline in C&I lending at 

both community banks and noncommunity banks was 

largely driven by the reduction in PPP lending. Excluding 

PPP loans, C&I lending grew 10.9 percent at community 

banks and 8.9 percent at noncommunity banks. This 

growth reflects the re-opening of small businesses, new 

business applications, and strong consumer spending. 

Community banks remain an important source of 

funding to small businesses. While small business 

loans declined in total in 2021 from 2020 levels, the level 

remains higher than before the pandemic.78 Further, 

these loans remained a larger portion of the C&I loan 

portfolio at community banks than at noncommunity 

banks. Community banks saw their share of small 

business loans as a percentage of total C&I rise from 

42.7 percent at year-end 2019 to 48.2 percent at year-end 

2020, owing primarily to PPP loans. As PPP loans were 

repaid or forgiven, the share of small business loans 

to C&I loans declined (Chart 44). Noncommunity bank 

small business loans also rose during the pandemic 

with the PPP, but small business loans represented 

only 14.6 percent of their total C&I loans. In addition, 

community banks’ share of the industry’s small business 

loans (25. 6 percent) is more than twice their share of 

total C&I loans (10.7 percent) (Table 2). 

Asset quality remained strong despite the pandemic 

stress on small businesses. The banking industry 

reported improvement in commercial loan quality with 

a 31 basis point decline in the total C&I loan noncurrent 

rate to 0.68 percent between fourth quarter 2020 and 

fourth quarter 2021. Community banks, however, saw a 

slight rise in the C&I loan noncurrent rate of 5 basis points 

to 0.71 percent in fourth quarter 2021 (Chart 45). Despite 

the rise, community banks’ C&I noncurrent rate remained 

Chart 43 

Business Formation Was Higher During the 

Pandemic Than in Pre-Pandemic Periods 

Number of Business Applications 

All 600,000 

500,000 

400,000 

300,000 

200,000 

100,000 

0 

2018 2019 2020 2021 

High Propensity 

Non-High Propensity 

Source: U.S. Census Bureau, Business Formation Applications. 

Note: A high-propensity business is one that employs others. Data is from 

January 2018 through December 2021. 

Chart 44 

Small Business Loans Account for a Greater 

Share of Community Bank C&I Portfolios Than 

Noncommunity Bank’s C&I Portfolios 

Small Business Loans as 

a Percent of C&I Loan

60 

s 

Community Banks 

Noncommunity Banks 

40 

20 

0 

2015 2016 

Source: FDIC. 

2017 2018 2019 2020 2021 

Note: Small business loans are commercial and industrial loans with 

balances less than $1 million. 

well below the pre-pandemic level. The C&I loan net 

charge-off rate for the industry improved 35 basis points 

to 0.13 percent in fourth quarter 2021 from fourth quarter 

2020, while the C&I net charge-off rate for community 

banks improved from 0.32 percent to 0.20 percent. 

77 In this section, all data referencing community banks and noncommunity banks reflect merger-adjusted performance measures. For an explanation of the reasons 

for and process of merger adjusting bank data, see Eric Breitenstein and Derek Thieme, “Merger Adjusting Bank Data: A Primer,” FDIC Quarterly 13, no. 1 (2019):31-49, 

https://www.fdic.gov/analysis/quarterly-banking-profile/fdic-quarterly/2019-vol13-1/fdic-v13n1-4q2018-article.pdf. 78 Small business loans are commercial and industrial loans with balances less than $1 million. 
2022 Risk Review | 51 

Table 2 

Community Banks Hold an Outsized Share of Small Business Loans Compared to Their C&I Loans 

2015 2016 2017 2018 2019 2020 2021 

Share of C&I Loans Community Banks 8.6 8.7 9.0 9.0 9.3 12.7 10.7 

(Percent) Noncommunity Banks 91.4 91.3 91.0 91.0 90.7 87.3 89.3 

Share of Small Community Banks 23.5 23.2 23.4 23.7 23.7 26.5 25.6 

Business Loans 

(Percent) Noncommunity Banks 76.5 76.8 76.6 76.3 76.3 73.5 74.4 

Source: FDIC. 

Chart 45 

Community Bank C&I Credit Quality Metrics Are Stronger in 2021 Than 

Before the Pandemic 

Percent 

Noncommunity Bank C&I Noncurrent Rate 1.5 Community Bank C&I Noncurrent Rate 

0.0 

2015 2016 2017 2018 2019 2020 2021 

Source: FDIC. 

Note: C&I loans are commercial and industrial loans. 

0.5 

1.0 

Noncommunity Bank C&I Net Charge-o ̃ Rate 

Community Bank C&I Net Charge-o ̃ Rate 

Despite improved conditions for small businesses, 

several risks remain that may adversely affect banks. 

First, while business re-openings have occurred in many 

industries, some sectors continue to be affected by 

the pandemic, particularly the leisure and hospitality 

industry.79 When these industries will return to prepandemic levels of operation is unknown, and this 

extended closure may negatively affect borrowers and 

banks in the long term. Second, many small businesses 

face labor shortages. The December 2021 National 

Federation of Independent Business (NFIB) survey 

indicated that 49 percent of respondents could not 

find workers to fill vacancies in the month. Perhaps 

to combat the lack of qualified applicants, 48 percent 

of respondents stated that they raised salaries. Third, 

the 2021 inflation rate of 7.0 percent has become a 

primary concern for 22 percent of the December NFIB 

survey respondents. Yelp economic data show that 

reviewers are more frequently reporting increasing 

prices at businesses. However, these data also show 

that searches for higher-end businesses rose in recent 

months (for example, searches for the “$$$$” rating are 

up 56 percent in 2021 from 2019). Although consumers 

may be adapting to higher prices, businesses remain 

pessimistic about the economy and the Federal 

Reserve’s intent to raise interest rates in 2022. Rising 

interest rates may negatively affect the demand for small 

business loans.80 Small businesses may be reluctant to 

borrow at higher rates if their business operations have 

not returned to pre-pandemic levels. 

79 The American Hotel & Lodging Association in Collaboration with Accenture 2022 State of the Hotel Industry Report, “The Year of the ‘New’ Traveler.” 

80 National Federation of Independent Business, Small Business Economic Trends, December 2021. 
52 | 2022 Risk Review 

 

 

 

MARKET RISK 

Interest Rate Risk and Net Interest Margin 

• NIM narrowed to a record low in 2021 as low interest rates and excess liquidity continued to weigh on asset 

yields, particularly in the first half of the year.81 

• To capture yield as interest rates began to rise, banks extended their balance sheet maturity by holding more 

long-term securities. 

• Rising interest rates in 2022 could pressure bank funding costs and pose interest rate risk challenges to banks 

that invested heavily in long-term securities in recent years. 

The steep decline in interest rates and unprecedented 

inflow of deposits to the banking system that occurred 

in 2020 continued to exert downward pressure on 

NIM in 2021. The industry reported a decline in fullyear NIM from 2.82 percent in 2020 to a record low 

2.54 percent in 2021. Noncommunity banks, which also 

reported a record low full-year NIM in 2021, drove the 

low industry NIM. Community bank NIM also declined, 

but by less than half that of noncommunity bank NIM 

in 2021 (Chart 46). The average NIM at community 

banks narrowed 12 basis points to 3.27 percent, while 

the average NIM at noncommunity banks narrowed 

31 basis points to 2.44 percent. Approximately threequarters of both community and noncommunity banks 

Chart 46 

reported a decline in NIM between 2020 and 2021, but 

different factors drove the decline. Lower net interest 

income from one year earlier and growth in low-yielding 

earning assets contributed to lower average NIM among 

noncommunity banks. Community banks, on the other 

hand, reported higher net interest income from the prior 

year from growth in earning assets, but overall asset 

yields were low enough to drive down the average NIM. 

While full-year NIM is lower than one year earlier, 

the annual decline in 2021 was smaller than in 2020. 

Quarterly NIM stabilized in the second half of 2021 

(Chart 47). Increased deferred fee income from the 

payoff and forgiveness of PPP loans, rising long-term 

The Banking Industry Reported Record Low Net Interest Margin in 2021 

Full-Year Net Interest Margin 

Percent 

4.5 

Noncommunity Banks 2.0 

Industry 1.5 

1.0 

0.5 

0.0 

1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 

Source: FDIC. 

Note: Full-year weighted average net interest margin. 

3.27 

2.44 2.5 2.54

3.0 

3.5 

4.0 

Community Banks 

81 All references of “record low” in this analysis of interest rate risk and net interest margin are compared against all dates including and after first quarter 1984. 
2022 Risk Review | 53 

 

 

 

interest rates, continued declines in the cost of funds, 

and extension into longer-maturity assets on the balance 

sheet contributed to the NIM improvement. 

Banks continued to report high deposit growth 

and deploy those deposits into low-yielding liquid 

assets that suppressed asset yields in 2021. The 

fourth quarter 2021 annual deposit growth rate, while 

lower than the annual deposit growth rate reported in 

Chart 47 

fourth quarter 2020, was still greater than any annual 

deposit growth rate reported between 2012 and 2019. 

The ratio of deposits to assets reached a record high 

at noncommunity banks and near-record high at 

community banks in fourth quarter 2021, but annual 

growth in this ratio was particularly high at community 

banks (Chart 48).82 

Banks Reported Record High Deposits to Assets and Cash and Securities to 

Assets in 2021 

0 

10 

20 

30 

40 

50 

60 

70 

80 

90 

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

Deposits Deposits 

Net Loans and Leases Net Loans and Leases 

Cash and Securities Cash and Securities 

Percent of Assets 

Noncommunity Bank Community Bank 

Source: FDIC. 

Note: Cash and securities includes balances due from depository institutions. 

Net Interest Margin Compression Has Slowed or Reversed in Recent 

Quarters 

Quarter-Over-Quarter Change in Industry NIM Components 

Basis points 

20 

10 

0 

-10 

-20 

-30 Yield on Earning Assets 

Cost of Funds -40 

NIM 

-50 

-60 

-70 

Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 

Source: FDIC. 

Note: Quarterly weighted average net interest margin, yield on earning assets, and cost of funds. 

Chart 48 

82 The record high ratio of deposits to assets at community banks occurred prior to the timeframe of Chart 48. In second quarter 1985, the ratio reached 87.4 percent. 
54 | 2022 Risk Review 

 

 

 

 

A shift in the composition of bank assets accompanied 

the growth in deposits. With low loan demand, 

banks continued to invest more into low-yielding 

liquid assets like cash and securities. These balances 

increased at annual rates not often seen before the 

pandemic, and the industry ratio of cash and securities 

to assets reached a record high in fourth quarter 

2021.83 Simultaneously, the industry share of loans to 

assets fell to a record low 47 percent in third quarter 

2021. Community banks reported the lowest loansto-assets ratio since first quarter 2013 (62 percent) 

and noncommunity banks reported a record low 

45 percent. 

The continued shift in balance sheet composition into 

cash and securities, which generally have lower yields 

than loans, resulted in the lowest full-year yield on 

earning assets on record in 2021. Community banks 

reported a smaller decline in asset yields from 2020 

(41 basis points) than noncommunity banks (54 basis 

points). 

Market interest rates rose in 2021 and began to 

alleviate the pressure on asset yields caused by the 

shift in balance sheet composition, while the decline in 

funding costs slowed. The industry reported a 52 basis 

point decline in full-year yield on earning assets in 2021 

compared with a decline of 109 basis points in 2020. 

When broad market interest rates increased between 

third quarter 2020 and fourth quarter 2021, banks took 

advantage of the rise in longer-term rates and generally 

reported smaller quarterly declines in asset yields in 

2021 than in 2020. 

Despite higher interest rates, industry funding costs 

continued to decline in 2021; however, the rate of 

decline slowed during the year. Noninterest-bearing 

deposit balances grew at a faster pace than interestbearing deposit balances in 2021, which shifted 

the composition of total deposits toward no-cost 

noninterest-bearing deposits. The reduced reliance on 

higher-cost funding sources allowed banks to lower their 

full-year cost of funds by 24 basis points from 2020 to a 

record low 17 basis points in 2021. Community banks, 

which reported a slightly larger shift into noninterestbearing deposits than noncommunity banks, reported 

a slightly larger decline in cost of funds (down 29 basis 

points) than noncommunity banks (down 23 basis 

points). 

As market interest rates rose throughout 2021 and 

supported smaller declines in asset yields, they also 

began to pressure bank cost of funds. Banks reported 

ever-smaller quarterly declines in their cost of funds 

throughout 2021, and in fourth quarter reported a 

decline of only 1 basis point. 

To earn return in a low loan demand and low interest 

rate environment, banks lengthened the maturity of 

their securities portfolios. After years of shortening the 

average maturity of their securities portfolio, community 

banks increased the share of long-term securities to 

assets by 5.6 percentage points to 17.2 percent since 

the onset of the pandemic (Chart 49).84 The share of 

long-term securities held by banks relative to assets is 

the highest reported since first quarter 2014. The trend 

was similar at noncommunity banks, which reported a 

5.7 percentage point increase in the share of long-term 

securities to assets since the onset of the pandemic, to a 

record high 20.9 percent. 

The risk of higher interest rates poses challenges to 

banks that invested heavily in long-term securities 

when rates were relatively low and will pressure 

funding costs for all banks. While the maturity 

extension in the securities portfolio in 2021 may have 

helped to supplement interest income and generate 

higher yields, banks now face the challenge of managing 

this portfolio in a rising interest rate environment. Banks 

with a higher share of long-term securities may see 

limited growth in yield on earning assets should market 

rates rise. If paired with higher funding costs, these 

fixed yields could lead to greater NIM compression. In 

addition, the existing long-term securities portfolio may 

decline in value when rates rise, producing unrealized 

losses on the available for sale portfolio. 

Despite these risks, banks tend to report an expansion 

in NIM when interest rates rise, as their yield on earning 

83 When comparing data to data prior to the pandemic, the quarter of reference is fourth quarter 2019. 

84 Long-term securities are those maturing or repricing in more than three years. 
2022 Risk Review | 55 

Chart 49 

Banks Have Deployed New Deposits Into Longer-Term Securities Amid Low 

Loan Demand 

0 

5 

10 

15 

20 

25 

30 

35 

40 

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

Noncommunity Bank Securities Noncommunity Bank Loans 

Community Bank Securities Community Bank Loans 

Loans and Securities Maturing or Repricing in More Than 3 Years 

Percent of assets 

Source: FDIC. 

assets tends to increase more than their cost of funds.85 

This supports higher NIM, particularly for community 

banks for which net interest income is a large share of 

revenue, and for banks that have more balance sheet 

capacity to invest in higher-earning assets such as loans 

and longer-term investments. 

85 Angela Hinton and Chester Polson, “The Historic Relationship Between Bank Net Interest Margins and Short-Term Interest Rates,” FDIC Quarterly 15, no. 2 (2021): 31– 

41, https://www.fdic.gov/analysis/quarterly-banking-profile/fdic-quarterly/2021-vol15-2/fdic-v15n2-1q2021.pdf. 
56 | 2022 Risk Review 

 

Liquidity and Deposits 

• Banking industry deposits and deposits held by community banks reached record levels in 2021. 

• Increased deposits and diminished loan demand contributed to higher levels of liquid assets. 

• Reliance on wholesale funding by community banks decreased as liquid assets grew.86 

• Community banks with sufficient liquidity and effective risk management programs are well equipped to meet 

potential funding demands. 

Since the start of the pandemic, government support and consumer behavior changes have resulted in 

an influx of deposits to the banking system. Since 2019, bank deposits have increased by $5.2 trillion, or 

36 percent, which includes $534 billion held by community banks. 

• In aggregate, community banks report 29 percent deposit growth between 2019 and 2021. 

• Compared to 2019, community banks in Alaska report the highest deposit growth at 68 percent, followed 

closely by Utah at 67 percent. 

• Since 2019, community banks in seven states—Alaska, Idaho, Montana, North Carolina, Oregon, South 

Carolina, and Utah—reported deposit growth at 50 percent or higher. 

Community Banks Reported Strong Deposit Growth the Past Two Years 

Two-Year Deposit Growth Rate 

for Community Banks

 Top 5 

68 

30 

34 

36 

26 

36 

National Average 

39 

45 

40 45

32 

39 37 50 

58 

43 

50 

62 

32 

34 

42 

67 

46 

40 

35 

27 

27 

29 40 

31 

40 

34 

21 

45 

24 

31 

45 

34 42 

36 

29 43 44 

55 

46 

32 

35 

38 

41 

41 

Two-Year Deposit 

Growth Rate: 40 percent 

 Above Nationwide Average

 Below Nationwide Average

 Bottom 5 

Source: FDIC. 

86 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. 
2022 Risk Review | 57 

 

 

 

 

 

 

 

 

Deposit growth continued to outpace loan demand 

in 2021. Total banking industry deposits grew by 

$1.9 trillion in 2021 to $19.7 trillion, the highest deposit 

level since data collection began in 1984. Community 

banks accounted for $245 billion of total 2021 deposit 

growth, a 12 percent increase from 2020 and above the 

10 percent increase reported by noncommunity banks. 

Deposits among community banks reached a record 

high $2.4 trillion at year-end 2021 and equaled nearly 

86 percent of community bank total assets (Chart 50). 

Since year-end 2019, community banks have added a 

record $534 billion in deposits. 

The strong increase in deposits in 2021 far exceeded 

loan growth. Total banking industry loans increased 

$383.2 billion in 2021, of which $8.1 billion was 

attributable to community banks. As a result, the 

community bank loans-to-total assets ratio declined 

from 67 percent in 2020 to 62 percent. 

High deposit growth combined with low loan demand 

contributed to record levels of liquid assets. Financial 

institutions allocated most of the excess liquidity into 

securities and interest-bearing cash accounts. Liquid 

assets held at community banks, including unpledged 

securities (securities not pledged as collateral), cash and 

due from accounts, federal funds sold, and securities 

purchased under resale agreements, increased from 

23 percent of total assets in 2020 to 27 percent in 

Chart 50 

2021 (Chart 51). Unpledged securities make up the 

largest share. In 2021, community banks reported 

$408 billion in unpledged securities, up 50 percent from 

2020. 

Securities portfolio growth in 2021 was primarily driven 

by investments in mortgage-backed securities, U.S. 

Treasuries, and municipal securities. At 44 percent, 

mortgage-backed securities comprise the largest share 

of securities held by community banks, followed by 

municipal securities at 28 percent. 

As community bank liquid asset levels increased, 

wholesale funding fell. Historically, community banks 

have relied more on traditional deposits to fund loan 

growth rather than on wholesale funding sources 

such as Federal Home Loan Bank (FHLB) borrowings, 

brokered deposits, public funds, and other funding 

sources like the Paycheck Protection Plan Liquidity 

Facility (PPPLF), a credit facility introduced in 2020 to 

help banks maintain adequate liquidity. Strong deposit 

growth during the pandemic contributed to a reduction 

in wholesale funding. Among community banks, 

wholesale funding levels decreased in 2021 as liquid 

assets grew. The ratio of wholesale funding to total 

assets at community banks fell to 13 percent in 2021, 

down from 15 percent in 2020 (Chart 52). The largest 

declines were in FHLB borrowings and other borrowings. 

The reduction in other borrowings was largely attributed 

Community Bank Deposits Continue to Reach Record Levels 

Deposits Deposits to Total Assets 

$ Trillions Percent 

1.7 1.7 1.7 1.7 1.8 1.8 1.8 1.8 

2.1 

2.4 

82.7 

82.2 

85.7 

80 

81 

82 

83 

84 

85 

86 

1.50 

1.75 

2.00 

2.25 

2.50 

Deposits (Le ̃ Axis) 

Deposits as a Percent of Total Assets (Right Axis ) 

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 

Source: FDIC. 
58 | 2022 Risk Review 

to the payoff or forgiveness of credit lines extended 

through the PPPLF. 

Community banks with sufficient liquidity are well 

positioned for sudden changes in consumer and 

business customer demands. The permanence of 

consumer and business deposits is unknown. Banks 

Chart 51 

with appropriate levels of liquidity are well positioned 

to meet potential loan funding and deposit outflow 

demands. Community banks with sufficient levels of 

liquid assets and strong liquidity risk management 

programs are best equipped to navigate a changing 

interest rate environment. 

Community Bank Liquid Assets Increased Significantly 

Liquid Assets to Total Assets 

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 

Source: FDIC. 

282 

408 

126 

284 

24 

17 

27 

0 

5 

10 

15 

20 

25 

30 

0 

200 

400 

600 

800 Unpledged Securities (Le ̃ Axis) 

Interest-Bearing Cash (Le ̃ Axis) 

Noninterest-Bearing Cash (Le ̃ Axis) 

Fed Funds & Repos Sold (Le ̃ Axis) 

Liquid Assets to Total Assets (Right Axis) 

$ Billions Percent 

Chart 52 

Community Bank Reliance on Wholesale Funds Fell as Liquid Assets 

Increased 

Total Loans Wholesale Funds to Total Assets 

$ Trillions Total Loans Percent 

Wholesale Funds to Total Assets 1.8 

1.3 

1.6 

1.7 1.7 

20 13 

16 1.7 

1.6 15 

1.5 

1.4 10 

1.3 

1.2 5 

1.1 

1.0 0 

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 

Source: FDIC. 
2022 Risk Review | 59 

OPERATIONAL RISK 

Cyber Threats and Illicit Activities 

• Cyber attacks continue to evolve, become more sophisticated, and multiply as bad actors discover creative 

ways to exploit technological and operational vulnerabilities. 

• In 2021, ransomware attacks in financial services offered by banks increased. 

• Geopolitical events increase the likelihood of cyber attacks on banks. 

• Zero-day vulnerabilities in software continue to be discovered and present significant risk until they are 

resolved. 

• Malicious cyber threat actors pose serious risk to bank information systems by compromising the security of 

software and computing services provided by third-party suppliers. 

• Criminals continue to develop innovative techniques to launder funds from illicit activities, demanding that 

financial institutions remain vigilant. 

Operational risk in banking is one of the most critical 

risks to banks. Cyber attacks continue to evolve, 

become more sophisticated, and multiply as bad 

actors discover creative ways to exploit technological 

and operational vulnerabilities. To manage new 

operational demands presented by the pandemic, the 

banking sector expanded remote financial services 

to personally owned computers and mobile devices, 

increased use of remote work options, and relied more 

heavily on third-party providers including cloudbased environments, all of which have increased the 

importance of effective cyber controls. To safeguard 

the security and privacy of customer information, some 

banks built out telecommunications infrastructures, 

increased internet capacity in data centers, and 

enhanced application portfolios to enhance remote 

productivity. Technology advances require bank 

managers to continuously improve cybersecurity and 

other internal controls to create operational resilience 

and mitigate the risk that their bank will suffer a 

significant service disruption. 

In late 2021 the FDIC, the Board of Governors of 

the Federal Reserve System, and the Office of the 

Comptroller of the Currency issued a joint final rule 

requiring a bank to notify its primary federal regulator 

agencies of the most severe incidents.87 

Geopolitical events increase the likelihood of cyber 

attacks on banks. The U.S. Department of Homeland 

Security’s Cybersecurity and Infrastructure Security 

Agency (CISA) issued alerts addressing risks from 

Russian state-sponsored cyber threats88 and highlighting 

recent malicious cyber incidents suffered by public and 

private entities in Ukraine.89 Given ongoing geopolitical 

events, CISA, the Federal Bureau of Investigation, and 

the National Security Agency encourage organizations of 

all sizes to adopt a heightened state of awareness and to 

be prepared to respond to disruptive cyber activity. 

Bank ransomware attacks increased in 2021. In a 

ransomware attack, cyber actors encrypt and steal 

data, and demand a ransom from the bank in exchange 

for the decryption keys and for a promise not to 

publicly disclose the attack and stolen data. Reports 

of such attacks as of June 2021 exceeded the 2020 

total (Chart 53). The potential operational impacts 

of ransomware include disruption of core business 

activities, operational outages, lockout of business 

87 See “Computer-Security Incident Notification Final Rule,” Financial Institution Letter, FIL-74-2021, November 18, 2021, https://www.fdic.gov/news/financialinstitution-letters/2021/fil21074.html. 88 See CISA, “Understanding and Mitigating Russian State-Sponsored Cyber Threats to U.S. Critical Infrastructure,” January 11, 2022, https://www.cisa.gov/uscert/ 

sites/default/files/publications/AA22-011A_Joint_CSA_Understanding_and_Mitigating%20_Russian_Cyber_Threats_to_US_Critical_Infrastructure_TLPWHITE_01-10-22_v1.pdf. 89 See CISA, “Implement Cybersecurity Measures Now to Protect Against Potential Critical Threats,” January 18, 2022, https://www.cisa.gov/sites/default/files/ 

publications/CISA_Insights-Implement_Cybersecurity_Measures_Now_to_Protect_Against_Critical_Threats_508C.pdf. 
60 | 2022 Risk Review 

635 

data, and the need to switch to manual operations. 

These attacks typically leverage known software 

vulnerabilities, compromised credentials, or phishing 

emails targeting bank employees to gain access to 

networks through remote access channels. Once 

threat actors gain access, they conduct ransomware 

and other extortion campaigns. When banks apply 

effective cybersecurity risk management and mitigation 

principles, they reduce the risk of a cyber attack’s 

success and minimize its negative impacts. 

There is no indication that the elevated levels of 

operational risk from threats such as ransomware 

in the banking sector will abate in the near term. 

Proliferation of tactics, tools, and accesses have 

targeted a greater number of networks as experienced 

malicious cyber actors offer their services to a growing 

number of unsophisticated recruits, as exemplified by 

the illicit and prolific Ransomware-as-a-Service (RaaS) 

business paradigm. Further, outside of developing new 

ransomware campaigns, the growing professionalization 

of this “dark market” has precipitated phenomena such 

as the reintroduction of updated ransomware, which 

continued to be destructive to network operations of 

critical infrastructures. 

Banks have experienced more sophisticated cyber 

attacks since the start of the pandemic. Since 2020, 

there has been a material increase in the number 

of customers, employees, and other users remotely 

accessing bank information systems. This increase was 

driven by an expansion of bank employees working 

remotely, customers accessing digital banking services, 

and third-party applications connected to bank 

systems. At the same time, the FDIC’s supervisory and 

threat monitoring process confirms that banks are 

encountering substantial security and operational risks 

from malicious cyber threat actors attacking banks’ 

authentication security. These malicious actors seek to 

compromise a bank’s authentication security to gain 

unauthorized access to customer information, deploy 

ransomware and other malware, and initiate fraudulent 

Chart 53 

Ransomware Attacks Increased Significantly in 

Recent Years 

Ransomware-Related Suspicious Activity Reports 

Number of reports filed 

700 

600 

487 500 

400 360 

300 

217 216 

181 200 

100 60 

9 19

0 

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 

0 0 

Source: FinCEN. 

Note: Data are from 2011 to June 2021. 

transactions on customer accounts. Frequently, these 

malicious actors leverage customer and user credentials 

compromised in earlier attacks on unrelated entities, 

such as merchants and online services. Customers 

and users frequently register the same credentials 

across multiple entities’ systems, including the bank’s 

information system, which weakens the effectiveness 

of credentials as part of layered security controls. 

Malicious actors also use email phishing campaigns 

and automated hacking tools in their attacks on bank 

authentication controls for information systems. 

On August 11, 2021, the Federal Financial Institutions 

Examination Council (FFIEC) issued the guidance 

document, “Authentication and Access to Financial 

Institution Services and Systems,” which highlights 

the current cyber threat environment and effective 

authentication methods.90 This guidance provides risk 

management principles and practices that can support 

authentication of customers, employees, and other 

users and devices, which are critical to combating cyber 

risks, including ransomware. 

90 Federal Financial Institutions Examination Council, “FFIEC Issues Guidance on Authentication and Access to Financial Institution Services and Systems,” news release, 

August 11, 2021, https://www.ffiec.gov/press/pr081121.htm. 
2022 Risk Review | 61 

 

Zero-day vulnerabilities continue to be discovered and present significant risk until they are resolved. A 

zero-day vulnerability is a computer-software vulnerability for which there is not yet an available patch to cure 

the vulnerability. Until the vulnerability is patched or otherwise mitigated, threat actors can exploit it to adversely 

affect systems, data, or a network. As captured by the MIT Technology Review, at least 66 such exploits were found 

in 2021, approximately double the totals for 2020 (37) and 2019 (28) and more than in any other year on record.91 

Zero Day Hacking Attacks Reached a Record in 2021 

Number of Reported Zero-Day Hack Attacks 

70 66 

60 

50 

42 41 

40 36 37 34 34 

31 28 28 30 25 

20 

10 

0 

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 

Source: MIT Technology Review, September 23, 2021. 

A recent and notable zero-day vulnerability was detected in certain versions of Apache’s Log4j software library, 

known as “Log4Shell.” Log4j is widely used in a variety of consumer and enterprise services, websites, and 

applications—and in operational technology products—to log security and performance information. An 

unauthenticated remote actor could exploit this vulnerability to take control of an affected system. On December 

11, 2021, the director of the U.S. Cybersecurity and Infrastructure Security Agency described the Log4j 

vulnerability as “being widely exploited by a growing set of threat actors” and presenting “an urgent challenge to 

network defenders given its broad use.”92 

Malicious cyber threat actors seek to gain access software during its development and by leveraging 

to bank information systems by compromising undiscovered vulnerabilities in the third-party software. 

the security of software and computing services The security risks arising from compromised thirdprovided by third-party suppliers. A bank’s information party software are challenging to mitigate given the 

technology (IT) environment is a complex arrangement multitude of third-party software within a bank’s IT 

of self-developed software, third-party software hosted environment and the sophistication of the software 

internally, and third-party software accessed remotely, compromises. In addition, these third-party software 

such as cloud-based software services. Malicious actors and computing services supply chain attacks have the 

have sought to gain illicit access to bank IT systems potential to negatively affect the security and operations 

by inserting malicious software into the third-party of a bank as the attackers have sought to compromise 

91 Patrick Howell O’Neill, “2021 Has Broken the Record for Zero-Day Hacking Attacks,” MIT Technology Review, September 23, 2021, 

https://www.technologyreview.com/2021/09/23/1036140/2021-record-zero-day-hacks-reasons/. 92 Cybersecurity and Infrastructure Security Agency, “Statement from CISA Director Easterly on ‘Log4J’ Vulnerability,” news release, December 11, 2021, 

https://www.cisa.gov/news/2021/12/11/statement-cisa-director-easterly-log4j-vulnerability. 
62 | 2022 Risk Review 

third-party software that controls privileged access and 

roles within the bank’s IT environment, such as network 

management and security software applications. 

The supply chain’s vulnerability to cyber attacks was 

highlighted in 2021 by the SolarWinds attack and later 

in the year by the Kaseya VSA attack, both of which 

prompted changes in supply chain protocols and 

guidelines for the U.S. government and commercial 

industries. Evidence suggesting that state-sponsored 

cyber actors may have influenced outcomes in these 

attacks has intensified the urgency to address supply 

chain vulnerabilities. These threats, in their current or 

some other evolved form, are expected to continue in 

2022 and beyond. 

To provide additional perspective on these risks, the 

FFIEC published the “Architecture, Infrastructure, 

and Operations” booklet of the FFIEC Information 

Technology Examination Handbook (IT Handbook) 

on June 30, 2021.93 The booklet discusses the 

interconnections among an entity’s assets, processes, 

and third-party service providers. It also addresses 

principles and practices for promoting safety and 

soundness, including secure and resilient architecture 

design, infrastructure implementation, and operation of 

information technology systems. 

Criminals continue to develop innovative techniques 

to launder funds from illicit activities through 

banks, necessitating that banks remain vigilant in 

detecting potentially illicit financial activity and 

monitoring for suspicious activity including evolving 

money laundering, fraud, and other illicit activity 

typologies. Illicit funds derived from a variety of criminal 

activities may corrupt and may ultimately destabilize 

communities or entire economies. Terrorist networks 

can facilitate activities when they have financial means 

and access to the formal or an informal financial system. 

Individuals and groups engaged in money laundering, 

terrorist financing, and other illicit financial activities 

exploit weaknesses in the legitimate financial system by 

obscuring the source of funds, concealing the originator 

or ultimate beneficiary of funds, or obfuscating the 

nature and purpose of the customer relationship. To 

combat this activity, banks develop, implement, and 

maintain effective Anti-Money Laundering/Countering 

the Financing of Terrorism (AML/CFT) programs that 

address known risks and the ever-changing strategies 

of individuals or groups engaged in money laundering, 

terrorist financing, and other illicit financial activities 

within the U.S. financial system.94 

To help financial institutions and other covered entities 

combat money laundering and counter terrorist 

financing, the U.S. Department of the Treasury’s 

Financial Crimes Enforcement Network (FinCEN) 

issued the Anti-Money Laundering and Countering the 

Financing of Terrorism National Priorities (the AML/ 

CFT Priorities) on June 30, 2021.95 Consistent with the 

requirements of Section 6101(b)(2)(C) of the Anti-Money 

Laundering (AML) Act of 2020, the AML/CFT Priorities 

were established by the Secretary of the Treasury 

in consultation with the Attorney General, federal 

functional regulators, relevant state financial regulators, 

and relevant national security agencies.96 The AML/CFT 

Priorities focus on threats to the U.S. financial system 

and to national security, including: 

• corruption 

• cybercrime, including relevant cybersecurity and 

virtual currency considerations 

93 Federal Financial Institutions Examination Council Information Technology Examination Handbook on “Architecture, Infrastructure, and Operations,” June 2021, 

https://ithandbook.ffiec.gov/media/402799/ffiec_itbooklet_aio.pdf. 94 In January 2021, Congress passed the AML Act of 2020, which required FinCEN, in consultation with Federal functional regulators, (collectively referred to as the 

“Agencies”) to promulgate AML/CFT regulations. Due to the addition of the CFT, the Agencies will use the AML/CFT instead of Bank Secrecy Act (BSA)/AML, when 

referring to a financial institution’s compliance program. For consistency, the FDIC will use the term AML/CFT (which includes BSA/AML) instead of BSA/AML when 

referring to, issuing, or amending regulations to address the requirements of the AML Act of 2020. 

95 Covered institutions are financial institutions required by BSA regulations to maintain an AML program. See 31 CFR §§ 1020.210(a) (banks); 1020.210(b) (banks 

without a federal functional regulator); 1021.210 (casinos and card clubs); 1022.210 (money services businesses); 1023.210 (brokers or dealers in securities); 1024.210 

(mutual funds); 1025.210 (insurance companies); 1026.210 (futures commission merchants and introducing brokers in commodities); 1027.210 (dealers in precious 

metals, precious stones, or jewels); 1028.210 (operators of credit card systems); 1029.210 (loan or finance companies); and 1030.210 (housing government-sponsored 

enterprises). For information on AML/CFT Priorities, see Anti-Money Laundering and Countering the Financing of Terrorism National Priorities, June 30, 2021, at 

https://www.fincen.gov/sites/default/files/shared/AML_CFT%20Priorities%20(June%2030%2C%202021).pdf. 96 Congress passed the AML Act of 2020 on January 1, 2021, as part of the National Defense Authorization Act and is the most comprehensive set of reforms to the BSA 

since the passage of the 2001 USA PATRIOT Act. 
2022 Risk Review | 63 

• foreign and domestic terrorist financing 

• fraud 

• transnational criminal organization activity 

• drug trafficking organization activity 

• human trafficking and human smuggling 

• proliferation financing 

At a minimum, the AML/CFT Priorities will be updated 

every four years to account for new and emerging 

threats to the U.S. financial system and to national 

security. 

The FDIC, other federal banking agencies, FinCEN, 

and state bank and credit union regulators issued an 

Interagency Statement on the Issuance of the National 

Priorities to clarify that issuing the AML/CFT Priorities 

does not result in an immediate change in AML/CFT 

regulatory requirements. The statement further explains 

that banks are not required to incorporate the AML/CFT 

Priorities into their risk-based AML/CFT programs until 

the effective date of a final rule by FinCEN addressing 

the Priorities, and that the agencies will not examine 

for the incorporation of the AML/CFT Priorities until the 

effective date of final revised regulations.97 

97 FDIC, “Interagency Statement on the Issuance of the Anti-Money Laundering/Countering the Financing of Terrorism National Priorities,” Financial Institution Letter, 

FIL-46-2021, June 30, 2021, https://www.fdic.gov/news/financial-institution-letters/2021/fil21046.html. 
64 | 2022 Risk Review 

CLIMATE-RELATED FINANCIAL RISK 

Climate-Related Events 

• The frequency and intensity of severe climate-related events has increased in recent years.98 

• Two hurricanes, several wildfires, and a drought in 2021 affected many local communities and banks. 

• Identifying and assessing climate-related financial risks to the banking industry and the financial system is a 

top priority for the FDIC. 

Damages from severe climate-related events in 2021 totaled $145.0 billion, the third highest total cost since 

1980. 

• In 2021, severe climate-related events in the United States included two hurricanes, several wildfires, and

a major drought. 

• The counties affected by those hurricanes, wildfires, and drought were home to 472 bank headquarters

and 15,169 total bank branches. 

• Of those institutions, 379 were headquarters of community banks and 2,969 were branches of community

banks. 

Regional Exposure to Climate Change 

Dots on map represent banks located in counties affected by weather events in 2021. 

Sources: NOAA National Centers for Environmental Information, Federal Emergency Management Agency (FEMA), National Interagency Fire

Center, U.S. Drought Monitor, FDIC.

Note: Hurricane counties are FEMA major disaster-declared counties eligible for individual assistance for Hurricane Ida. There were no counties

designated as major disaster areas by FEMA for Hurricane Nicholas. Wildfire counties are counties within the perimeter of one of the four most

destructive wildfires of 2021. These wildfires include the Caldor and Dixie wildfires in Northern California, the Marshall Fire in Colorado, and the 

Bootleg Fire in Oregon. Drought counties are counties that experienced at least 12 weeks of “exceptional” drought during 2021. 

98 “Severe” climate-related events in this paper are those that caused at least $1 billion in damages. See NOAA National Centers for Environmental Information (NCEI) 

U.S. Billion-Dollar Weather and Climate Disasters (2022), https://www.ncdc.noaa.gov/billions/. 
2022 Risk Review | 65 

 

 

 

 

The effects of climate change present emerging 

financial risks to the banking industry.99 Climaterelated financial risks faced by banks include physical 

risks and transition risks. Physical risks refer to 

the financial losses resulting from harm to people 

and property from climate-related events, such as 

hurricanes, wildfires, and drought. Transition risks 

refer to financial risks to certain institutions or industry 

sectors that arise over time from the process of adjusting 

toward a low-carbon economy, which may be prompted 

by changes in climate and environmental policy, 

technology, or market sentiment. This discussion of 

climate-related financial risks focuses only on physical 

risks to communities and banks from severe climaterelated events in 2021, as transition risk is a longerterm, prospective risk that is beyond the scope of this 

retrospective review. 

The frequency and intensity of severe climate-related 

events has increased.

100 According to the National 

Oceanic and Atmospheric Administration (NOAA), the 

United States has experienced 310 severe weather 

Chart 54 

events since 1980 in which overall damage was at least 

$1 billion (adjusted to 2021 dollars) (Chart 54). The 

total cost of these events over the 42-year period was 

more than $2.1 trillion, and the number and aggregate 

cost of these events have risen substantially over those 

decades. 

Severe climate-related events in 2021 were among the 

costliest since 1980. During 2021, there were 20 severe 

climate-related events in the United States, slightly 

below the record high of 22 in 2020. Damages from the 

2021 severe climate events totaled $145.0 billion, the 

third-highest total cost since 1980 but below the 2017 

record of $346.1 billion. 

Estimated damages from two hurricanes in the 2021 

hurricane season were considerably higher than the 

2020 season. Ida and Nicholas were the only hurricanes 

that made landfall in the continental United States in 

2021. Estimated damages from these two hurricanes 

totaled $76.1 billion, an increase from an estimated 

$42.1 billion in damages from the six hurricanes in 

2020. Hurricane Ida, the more destructive of the 2021 

The Number of Billion-Dollar Disasters Has Been Rising Since 1980 

0 

50 

100 

150 

200 

250 

300 

350 

400 

0 

5 

10 

15 

20 

25 

1980 1985 1990 1995 2000 2005 2010 2015 2020 

Total Event Count (Le ̃ Axis) 

Total Event Cost (Right Axis) 

Annual Event Count 

Number 

Annual Total Cost of Events 

$ Billions (Inflation-Adjusted) 

Sources: National Oceanic and Atmospheric Administration National Centers for Environmental Information. 

Note: Natural disasters include droughts, floods, freezings, severe storms, tropical cyclones, wildfires, and 

winter storms. Data are annual figures from 1980 through 2021. 

99 Statement by Martin J. Gruenberg, Acting Chairman, FDIC Board of Directors On the Request for Comment on the Statement of Principles for Climate-Related 

Financial Risk Management for Large Financial Institutions, March 30, 2022, https://www.fdic.gov/news/speeches/2022/spmar3022.html. 100 Unless otherwise noted, all weather- and damage-specific data in this section are from NOAA National Centers for Environmental Information (NCEI) U.S. BillionDollar Weather and Climate Disasters (2022). See https://www.ncdc.noaa.gov/billions/, DOI: 10.25921/stkw-7w73. NOAA has adjusted its damage estimates for 

inflation to 2021 dollars. 
 

 

 

 

 

hurricanes, made landfall as a Category 4 hurricane 

in August 2021 in Louisiana, about 60 miles south of 

New Orleans. After weakening into a tropical storm, 

Ida traveled northeast, where it brought catastrophic 

rainfall, flooding, and loss of life across a wide region 

stretching from eastern Pennsylvania to New York.101 Ida 

caused an estimated $75 billion in damage, ranking it 

as the fifth-costliest hurricane to hit the mainland U.S. 

on record and the most-costly storm in the Northeast 

since Sandy in 2012.102 CoreLogic estimated that 40 to 

50 percent of Ida’s flood damage along the Gulf Coast 

was covered by insurance.103 

Just over two weeks after Ida struck, Hurricane 

Nicholas made landfall as a Category 1 hurricane near 

Sargent Beach, Texas, about 65 miles south of Houston. 

Although Nicholas reached hurricane strength for 

only a few hours, the slow-moving storm deposited 

a large amount of rain on Galveston, Houston, and 

other parts of southeastern Texas and southwestern 

Louisiana. According to NOAA, the storm “produced a 

fairly standard mix of minimal hurricane impacts.”104 

Nonetheless, several communities in the storm’s path 

were still recovering from Hurricane Ida and Hurricane 

Laura, which struck the Louisiana coast in 2020. 

The 2021 wildfire season in the western United States 

was severe, causing an estimated $10.6 billion in 

damages. In California, the 2021 wildfire season was 

the second largest in the state’s history as measured by 

acres burned (after the 2020 season), with 2.6 million 

acres burned and more than 3,600 structures damaged 

or destroyed. The most destructive wildfires in the state 

in 2021 were the Dixie and Caldor fires in Northern 

California. The Dixie Fire in July 2021 damaged or 

destroyed more than 1,300 structures and burned nearly 

1 million acres, making it the state’s second-largest 

wildfire by acres burned after the August Complex Fire 

in 2020. The Caldor Fire followed a few weeks later, 

burning over 220,000 acres and damaging or destroying 

more than 1,000 structures.105 In southern Oregon, the 

Bootleg Fire in July 2021 burned over 410,000 acres 

and damaged or destroyed more than 400 structures.106 

Colorado’s Marshall Fire damaged or destroyed more 

than 1,200 structures in Boulder County in December 

2021. This was the state’s most destructive wildfire in 

terms of structures lost.107 

While some wildfires may have been ignited by faulty 

electrical equipment or were human-caused, climatechange related issues contributed to the spread of and 

destruction caused by the wildfires. Ongoing drought 

in the West and record-high temperatures in 2021 left 

grasslands and forests dry and susceptible to wildfire 

ignition, in some cases exacerbated by strong winds. 

All of the counties affected by the year’s most severe 

fires were in “extreme” or “exceptional” drought when 

the fires started.108 In addition, population growth and 

increased construction of homes in the “wildland urban 

interface,” or areas of human development abutting 

undeveloped wildland, have also contributed to the 

rising cost of wildfires.109 

A serious drought encompassed much of the West 

throughout 2021. The effects of the drought were 

widespread. NOAA estimates the costs of the drought at 

$8.9 billion, making it the costliest since 2013. As shown 

in Table 3, 239 counties in 13 states experienced the 

worst drought conditions— “exceptional” conditions— 

for at least 12 weeks in 2021. In four states—New Mexico, 

101 In total, the Federal Emergency Management Agency (FEMA) designated 199 parishes and counties across seven states with any level of disaster designation from 

Hurricane (and later, Tropical Storm) Ida. Of this total, 25 parishes in Louisiana, 8 counties in Mississippi, and 33 counties across New York, New Jersey, Pennsylvania, 

and Connecticut were declared by the President to be eligible for individual assistance from FEMA. 

102 See data from the National Centers for Environmental Information, available at https://www.nodc.noaa.gov/archive/arc0153/0209268/9.9/data/0-data/eventsUS-1980-2021.csv. By contrast, the costliest hurricane in U.S. history was Katrina in 2005, which caused an estimated $182.5 billion in damages (adjusted to 2021 dollars). 103 CoreLogic, “CoreLogic Estimates $27 billion to $40 billion in Insured and Uninsured Losses from Hurricane Ida,” news release, September 1, 2021, 

https://www.corelogic.com/press-releases/corelogic-estimates-27-billion-to-40-billion-in-insured-and-uninsured-losses-from-hurricane-ida-wind-storm-surgeand-inland-flooding/. 104 NOAA National National Centers for Environmental Information, National Climate Report, September 2021. 

105 California Department of Forestry and Fire Protection. 

106 National Interagency Fire Center, Coordination Center’s Incident Management Situation Report, p. 5, https://www.predictiveservices.nifc.gov/ 

IMSR/2021/20210807IMSR.pdf. 107 Boulder Office of Emergency Management, “Boulder County Releases Updated List of Structures Damaged and Destroyed in the Marshall Fire,” news alert, January 6, 

2022, https://www.boulderoem.com/boulder-county-releases-updated-list-of-structures-damaged-and-destroyed-in-the-marshall-fire/. 108 U.S. Drought Monitor, https://droughtmonitor.unl.edu/Maps/MapArchive.aspx. 109 “Wildfire: An Issue Paper; Lessons Learned from the 2017 to 2021 Events,” January 2022, American Academy of Actuaries, Extreme Events and Property Lines 

Committee, https://www.actuary.org/sites/default/files/2022-02/Wildfire.2022_.pdf. 

66 | 2022 Risk Review 
 

 

 

 

 

 

 

 

 

 

Table 3 

Thirteen States Experienced Prolonged Periods of Exceptional Drought in 2021 

State 

Exceptional Drought 

Counties in 2021 

(Number) 

Exceptional Drought 

Counties in 2021 

(Percent of Counties in State) 

NM 31 94 

AZ 14 93 

UT 25 86 

CA 49 84 

OR 14 39 

WA 15 38 

MT 20 36 

NV 6 35 

ID 15 34 

CO 16 25 

ND 12 23 

WY 2 9 

TX 20 8 

Total 239 

Sources: U.S. Drought Monitor and U.S. Census Bureau. 

Note: Only counties that experienced at least 12 weeks of “exceptional” drought in 2021 are included. According 

to the U.S. Drought Monitor, exceptional drought has the potential to cause exceptional and widespread crop and 

pasture losses, as well as shortages of water in reservoirs, streams, and wells that create water emergencies. 

Arizona, Utah, and California—more than 80 percent 

of the state’s counties were considered in exceptional 

drought during the year. 

California, the largest agricultural producer in the 

nation by commodity value, accounting for nearly 

three-fourths of the nation’s fruit-and-nut production 

and over one-third of vegetable and melon production, 

was particularly affected by drought. A University 

of California-Merced study estimated the direct and 

indirect economic costs of the drought on California’s 

agricultural industry to be $1.7 billion.110 Drought 

conditions led major state and federal water programs to 

cut allocations of surface water to some California farms 

to zero. The water year ending September 30, 2021, 

was the second driest in California since 1924 based 

on precipitation and water runoff.111 Major reservoirs 

in the state reached record-low levels, leading to the 

shutdown of the hydroelectric power plant on Lake 

Oroville for the first time since it was built in 1967.112 

Record precipitation in October and December 2021 was 

beneficial, but a dry start to 2022 has caused drought 

conditions in California to worsen. Snowpack in the 

Sierra Nevada mountain range was at only 38 percent of 

the normal level on April 1, 2022, when the snow level 

typically is at its highest level.113 

110 Medellín-Azuara et al., “Economic Impacts of the 2021 Drought on California Agriculture,” February 24, 2022, p. ES-2, https://wsm.ucmerced.edu/wp-content/ 

uploads/2022/02/2021-Drought-Impact-Assessment_20210224.pdf. 111 California Department of Water Resources, “Water Year 2021: An Extreme Year,” September 2021, https://water.ca.gov/-/media/DWR-Website/Web-Pages/WaterBasics/Drought/Files/Publications-And-Reports/091521-Water-Year-2021-broch_v2.pdf. 112 California Department of Water Resources, “DWR Statement on the Status of Hyatt Powerplant at Lake Oroville,” news release, August 5, 2021, https://water.ca.gov/ 

News/News-Releases/2021/Aug-21/Hyatt-Statement. 113 California Department of Water Resources, “Survey Finds Little Snow as Statewide Snowpack Drops to 38 percent Following Record Dry Months,” April 1, 2022, news 

release, https://water.ca.gov/News/News-Releases/2022/April-22/April-2022-Snow-Survey. 

2022 Risk Review | 67 
 

 

 

Drought and severe heat affected other western 

states as well. In 2021, the water level in Lake Mead 

reached a record low leading to the first water shortage 

declaration. This declaration will result in reduced water 

released from the reservoirs to Arizona and Nevada in 

2022. 114 A severe heat wave gripped the West in 2021, 

with the Pacific Northwest in particular seeing recordhigh temperatures. For example, temperatures reached 

116 degrees in Portland and 108 degrees in Seattle. 

Ranchers throughout the West sold some of their cattle 

sooner than expected; almond farmers destroyed waterintensive almond trees before the end of their useful 

life; and some farmers elected to fallow fields due to 

lack of water. The USDA made $4.4 billion in payments 

to agricultural producers through its crop insurance 

program for drought- and heat-related claims in 2021. 

More than three-quarters of those payments were 

to farmers in the Dakotas, Minnesota, Montana, and 

Washington. Wheat, corn, and soybean losses received 

the highest payouts.115 In addition, federal legislation 

enacted in September 2021 authorizes $750 million 

in USDA assistance to livestock producers for losses 

incurred because of drought or wildfires in 2021.116 

Identifying and assessing climate-related financial 

risks to the banking industry and the financial 

system is a top priority for the FDIC. The increased 

frequency and intensity of climate-related events pose 

risk-management challenges to banks of all sizes, 

complexity, and business models through damage 

to bank-owned properties, such as main offices and 

branches, and properties that serve as collateral for 

bank loans. Banks operating in communities affected 

by severe climate-related events also face higher 

operational risks, such as the dislocation of facilities, 

personnel, and customers, and increased credit risk 

from deterioration in borrowers’ repayment ability 

because of higher costs or financial losses resulting from 

climate-related events. Climate-related financial risks 

are transmitted to banks through various channels. For 

example, severe climate-related events can disrupt local 

economic conditions and create detrimental effects on 

the broader economy, such as changes in asset values 

and migration patterns. 

Historically, individual climate-related events have had 

limited effect on bank performance and asset quality. 

Insurance proceeds and government assistance, as well 

as other sources of financial and economic support, 

risk mitigation strategies, and forbearance programs to 

borrowers in affected communities have helped insulate 

banks from the negative effects of individual climaterelated events. In many cases, the need for communities 

to rebuild following these events may create loan 

demand for banks, which helps to offset losses suffered 

by those communities because of these events; and, in 

some cases, increased loan demand has even resulted 

in increased bank earnings.117 To date, no bank failures 

have been attributed to individual climate-related 

events studied by the FDIC.118 However, the FDIC has not 

studied the impact of sequential climate-related events 

or the cumulative impact that climate-related financial 

risks could have on bank performance, asset quality, and 

the ongoing effectiveness of risk mitigation strategies. 

The FDIC will continue to monitor and evaluate climaterelated financial risks facing the banking industry. In 

2021, the FDIC published several Financial Institution 

Letters addressing Hurricane Ida, wildfires, and several 

other severe weather events to encourage banks to work 

with their adversely affected borrowers. In March 2022, 

the FDIC approved a proposed Statement of Principles 

for Climate-Related Financial Risk Management for 

Large Financial Institutions, as an initial step to promote 

a consistent understanding of effective management 

of climate-related financial risks across the banking 

industry.119 

114 Bureau of Reclamation, “Reclamation Announces 2022 Operating Conditions for Lake Powell and Lake Mead,” August, 16, 2021, news release, https://www.usbr.gov/ 

newsroom/#/news-release/3950. 115 USDA Risk Management Agency, Cause of Loss Historical Data Files, https://www.rma.usda.gov/SummaryOfBusiness/CauseOfLoss. 116 Extending Government Funding and Delivering Emergency Assistance Act, Pub. L. No. 117-43 (September 30, 2021). 

117 Federal Reserve Bank of New York, “How Bad Are Weather Disasters for Banks?” November 2021. 

118 Financial Stability Oversight Council Report on Climate-Related Financial Risk 2021, Chapter 2, p.28, https://home.treasury.gov/system/files/261/FSOC-ClimateReport.pdf. 119 FDIC, “FDIC Issues Request for Comment on Statement of Principles for Climate-Related Financial Risk Management for Large Financial Institutions,” news release 

PR-27-2022, March 30, 2022, https://www.fdic.gov/news/press-releases/2022/pr22027.html. The draft principles would provide a high-level framework for the safeand-sound management of exposures to climate-related financial risks. Although all financial institutions, regardless of size, may have material exposures to climaterelated financial risks, these draft principles are intended for the largest financial institutions, those with over $100 billion in total consolidated assets. 

68 | 2022 Risk Review 
Acronyms and Abbreviations 

ACL Allowance for Credit Losses 

ADC Acquisition, Development, and Construction 

AML Anti-Money Laundering 

BSA Bank Secrecy Act 

C&I Commercial and Industrial 

Call Report Consolidated Reports of Condition and Income 

CARES Act Coronavirus Aid, Relief, and Economic Security Act 

CISA Cybersecurity and Infrastructure Security Agency 

CLO Collateralized Loan Obligation 

CPI Consumer Price Index 

CRE Commercial Real Estate 

ESG Environmental, Social, and Governance 

FDIC Federal Deposit Insurance Corporation 

FEMA Federal Emergency Management Agency 

FFIEC Federal Financial Institutions Examination Council 

FHLB Federal Home Loan Bank 

GDP Gross Domestic Product 

GNMA Government National Mortgage Association 

IT Information Technology 

KBW Keefe, Bruyette, and Woods (Bank Index) 

LCD Leveraged Commentary and Data (S&P) 

LIBOR London Interbank Offered Rate 

2022 Risk Review | 69 
NASDAQ National Association of Securities Dealers Automated Quotations (Market Index) 

NIM Net Interest Margin 

NOAA National Oceanic and Atmospheric Administration 

ON RRP Overnight Reverse Repurchase Agreement 

OPEC Organization of the Petroleum Exporting Countries 

PCE Personal Consumption Expenditures 

PDNA Past-Due and Nonaccrual 

PPP Paycheck Protection Program 

PPPLF Paycheck Protection Program Liquidity Facility 

ROA Return on Assets 

S&P Standard and Poor’s (S&P 500) 

SOFR Secured Overnight Funding Rate 

TGA Treasury General Account 

USDA U.S. Department of Agriculture 

WTI West Texas Intermediate 

70 | 2022 Risk Review 
Glossary of Terms 

Accommodation A loan accommodation includes, in general, any agreement to defer 

one or more payments, make a partial payment, forbear any delinquent 

amounts, modify a loan or contract or provide other assistance or relief 

to a borrower who is experiencing a financial challenge. 

Bond A certificate of indebtedness issued by a government or corporation. 

Call Report A report of a bank’s financial condition that is filed quarterly with the 

FDIC and known officially as the Report of Condition and Income. 

Capital The net worth or value that remains if an institution paid off all of its 

liabilities. At its core, bank capital is equity. Bank capital or equity can 

be expressed by the basic accounting formula: Assets – Liabilities = 

Equity. See also Regulatory Capital. 

CARES Act The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed 

into law on March 27, 2020, which provided $2.2 trillion in economic 

relief in response to the COVID-19 pandemic. 

Central Bank An institution that oversees and regulates the banking system and 

quantity of money in the economy. The Federal Reserve System is the 

central bank of the United States. 

Climate-Related Financial Risks Climate-related financial risks include physical risks and transition risks. 

Physical risks refer to the financial losses resulting from harm to people 

and property from climate-related events, such as hurricanes, wildfires, 

and drought, and longer-term climate shifts such as sea level rise. 

Transition risks refer to financial risks to certain institutions or industry 

sectors that arise over time from the process of adjusting toward a lowcarbon economy, which may be prompted by changes in climate and 

environmental policy, technology, or market sentiment. 

Collateral Property required by a lender and offered by a borrower as a guarantee 

of payment on a loan. Also, a borrower’s savings, investments, or the 

value of the asset purchased that can be seized if the borrower fails to 

repay a debt. 

Collateralized Loan Obligations (CLOs) Securitization vehicles backed predominantly by commercial loans. 

See also Warehouse Lending. 

2022 Risk Review | 71 
Community Bank FDIC-insured institutions meeting the criteria for community banks 

defined in the FDIC’s Community Banking Study, published in December 

2020 

(https://www.fdic.gov/resources/community-banking/ 

report/2020/2020-cbi-study-full.pdf). Noncommunity banks are banks 

that do not meet these criteria. 

Default Failing to promptly pay interest or principal when due. 

Farm Bank A bank with agricultural production loans plus real estate loans secured 

by farmland equal to or exceeding 25 percent of total loans and leases. 

Federal Funds Rate The interest rate at which a depository institution lends funds that are 

immediately available to another depository institution overnight. 

Forbearance A forbearance plan suspends mortgage payments. A provision of 

the CARES Act required mortgage servicers or lenders to provide a 

forbearance plan to any homeowner with a federally backed mortgage 

who requested such a plan. 

Great Recession The protracted economic contraction from December 2007 through 

June 2009. The collapse of the U.S. housing market in 2007 became 

the most severe financial crisis since the Great Depression, and the 

financial crisis, in turn, resulted in the Great Recession, whose effects 

spread throughout the global economy. 

High Yield A term that is generally synonymous with noninvestment grade, which 

refers to the lowest-rated bonds subjected to third-party credit risk 

assessments by nationally recognized statistical ratings organizations 

(NRSROs). In the United States, noninvestment grade bonds are 

typically rated Ba1 or below by Moody’s or BB+ or below by Standard & 

Poor’s or Fitch. 

Investment Grade Generally, the highest-rated bonds subjected to third-party credit risk 

assessments by NRSROs. In the United States, investment-grade bonds 

are typically rated Baa3 or above by Moody’s or BBB- or above by 

Standard & Poor’s or Fitch. 

72 | 2022 Risk Review 
Leveraged Loans Numerous definitions of leveraged lending exist throughout the 

financial services industry and commonly contain some combination of 

the following: 

• Proceeds used for buyouts, acquisitions, or capital distributions. 

• Transactions where the borrower’s total debt divided by EBITDA 

(earnings before interest, taxes, depreciation, and amortization) 

or senior debt divided by EBITDA exceeds 4.0X EBITDA or 3.0X 

EBITDA, respectively, or other defined levels appropriate to the 

industry or sector. 

• A borrower recognized in the debt markets as a highly leveraged 

firm, which is characterized by a high debt-to-net-worth ratio. 

• Transaction in which the borrower’s post-financial leverage, as 

measured by its leverage ratios (for example, debt-to-assets, 

debt-to-net-worth, debt-to-cash flow, or other similar standards 

common to particular industries or sectors), significantly 

exceeds industry norms or historical levels. 

Long-Term Assets Loans and debt securities with remaining maturities or repricing 

intervals of more than five years. 

Negative Equity A situation in which a borrower’s mortgage principal is greater than 

the value of the underlying collateral, often real estate. See also 

Underwater. 

Net Interest Margin The difference between interest and dividends earned on interestbearing assets and interest paid to depositors and other creditors, 

expressed as a percentage of average earning assets. No adjustments 

are made for interest income that is tax exempt. 

Nonaccrual Loans and Leases Loans and leases 90 or more days past due and for which payment in 

full of principal or interest is not expected. 

Nonbank Firms that are not part of or affiliated with FDIC-insured depository 

institutions. See also Nondepository Financial Institution. 

Noncurrent Loans and Leases Loans and leases 90 days or more past due, and loans and leases in 

nonaccrual status. 

Nondepository Financial Institution A more specific categorization of nonbanks, consistent with the 

definition provided in the instructions for the Call Reports, including 

real estate investment trusts, mortgage companies, finance companies, 

holding companies of other depository institutions, investment 

banks, Small Business Investment Companies, and other financial 

intermediaries. For additional details, refer to the instructions for Call 

Report Schedule RC-C, Item 9.a. 

2022 Risk Review | 73 
 

 

OPEC+ 

Past-Due Loans and Leases 

Problem Banks 

Real Gross Domestic Product 

Rebooked Loans 

Regulatory Capital 

Regulatory Capital Requirements 

Recession 

Securitization 

Short-Term Liquid Assets 

An alliance formed in December 2016 of top oil-producing countries 

including members of the Organization of the Petroleum Exporting 

Countries (OPEC) and 10 non-OPEC partner countries. 

Loans and leases 30 to 89, or 90 days or more past due, and still accruing 

interest. 

Institutions with financial, operational, or managerial weaknesses that 

threaten their continued financial viability. Federal regulators assign a 

composite rating to each financial institution, based upon an evaluation 

of financial and operational criteria. The rating is based on a scale of 

1 to 5 in ascending order of supervisory concern. Depending upon the 

degree of risk and supervisory concern, problem banks are rated either 

“4” or “5.” 

The total market value of all final goods and services produced in an 

economy in a given year calculated by using a base year’s price for 

goods and services; nominal GDP adjusted for inflation. 

Bank repurchases of delinquent single-family mortgage loans backing 

mortgage-backed securities that are recorded on the mortgage banking 

schedule in bank Call Reports. 

Capital set aside to provide protection against (to absorb) losses. A 

measure of capital as defined by supervisory authorities. Generally, 

regulatory capital is calculated by deducting certain assets from bank 

capital that have no or limited loss-absorbing capacity, and adding 

other items. 

Requirements that consider the risk levels of a banking organization’s 

exposures and activities, and act to constrain leverage that a banking 

organization may incur by limiting the extent to which it can extend 

credit and invest in financial assets relative to money that the banking 

organization owes to others. Regulatory capital requirements are set at 

levels intended to foster the safety and soundness of individual banking 

organizations and the banking system. 

A period of declining real income and rising unemployment; significant 

decline in general economic activity over a period 

A financial transaction in which assets such as mortgage loans are 

pooled and securities representing interest in the pool are issued. 

Cash and due from accounts, federal funds sold, securities purchased 

under resale agreements, and securities maturing in less than one year. 

74 | 2022 Risk Review 
Treasury Securities Bonds, notes, and other debt instruments sold by the U.S. Treasury to 

finance U.S. government operations. 

Treasury Yield The effective interest rate paid by the U.S. government to borrow 

money for different lengths of time. It is the return on investment on 

the government’s debt obligations. 

Underwater A situation in which a borrower’s mortgage principal is greater than the 

value of the house, so the borrower owes more on the mortgage loan 

than the house is worth. 

Warehouse Lending Short-term funding of a mortgage lender based on the collateral of 

warehouse loans (in mortgage lending, loans that are funded and 

awaiting sale or delivery to an investor). This form of interim financing 

is used until the warehouse loans are sold to a permanent investor. 

Warehouse financing is also extended in the arrangement of CLOs 

and to other securitization firms. In this context, warehouse financing 

is a line of credit the CLO manager uses to purchase assets. Upon 

the CLO’s closing, the CLO repays the warehousing lenders using the 

proceeds from the sale of the notes, and the CLO becomes the owner 

of the assets. The CLO manager uses warehousing to manage market 

risk when they purchase assets for the deal’s portfolio; the warehouse 

provider assumes the risk of any mark-to-market losses in the portfolio 

during the warehousing period. 

Wholesale Funding Federal funds purchased and securities sold under agreement to 

repurchase; borrowings from the Federal Home Loan Bank; brokered 

and listing service, municipal and state, and foreign deposits; and other 

borrowings (such as from the Federal Reserve’s Payment Protection 

Program Liquidity Facility). Providers of wholesale funding closely 

track institutions’ financial condition and may cease or curtail funding, 

increase interest rates, or increase collateral requirements if they 

determine an institution’s financial condition is deteriorating. 

Yield Curve The relationship between maturities and interest rates on government 

bonds. The yield curve captures the cost of borrowing money to 

finance consumption, investment, or government spending and thus 

is of central importance to the entire economy. Yield curves generally 

exhibit three different shapes—normal, flat, and inverted—which are 

characterized by long-term interest rates being above, similar to, or 

below short-term interest rates. The shape of the yield curve often is 

viewed as an indicator of future economic activity. 

2022 Risk Review | 75 
76 | 2022 Risk Review 

PAGE INTENTIONALLY LEFT BLANK 
2022 Risk Review | 77 

PAGE INTENTIONALLY LEFT BLANK 
78 | 2022 Risk Review 

PAGE INTENTIONALLY LEFT BLANK 

FDIC-006-2022