Risk Review

2023

Risk Review

2023
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2023 Risk Review | i

TABLE OF CONTENTS

INTRODUCTION............................................................................................................................... 1

SECTION 1: Executive Summary....................................................................................................... 3

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

SECTION 2: Overview of the Economy, Financial Markets, and Banking Industry ................................. 7

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

Financial Markets.................................................................................................................................. 12

Banking Industry .................................................................................................................................. 16

SECTION 3: Credit Risks ...................................................................................................................... 23

Agriculture ............................................................................................................................................ 23

Commercial Real Estate........................................................................................................................ 28

Consumer Lending ............................................................................................................................... 33

Energy ................................................................................................................................................... 37

Housing ................................................................................................................................................. 40

Leveraged Lending and Corporate Debt.............................................................................................. 46

Nonbank Financial Institution Lending............................................................................................... 50

Small Business Lending........................................................................................................................ 53

SECTION 4: Market Risks .................................................................................................................... 57

Liquidity and Deposits.......................................................................................................................... 57

Net Interest Margins and Interest Rate Risk ........................................................................................ 62

SECTION 5: Operational Risk ..........................................................................................................67

SECTION 6: Crypto-Asset Risk .........................................................................................................71

SECTION 7: Climate-Related Financial Risk.....................................................................................73

ACRONYMS AND ABBREVIATIONS....................................................................................................79

GLOSSARY OF TERMS......................................................................................................................81
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2023 Risk Review | 1

INTRODUCTION

1 Unless otherwise noted, “community banks” are FDIC-insured institutions that meet the criteria for community banks that was developed for the FDIC 

Community Banking Study, published in December 2012.  Thresholds for certain criteria are adjusted upward quarterly and described in “Notes to Users” for the 

FDIC Quarterly Banking Profile.  See, for example: page 35 of the FDIC Quarterly Banking Profile, First Quarter 2023. Noncommunity banks are banks that do not 

meet these criteria.

2 This report contains banking information available as of March 31, 2023. Unless otherwise noted, banking industry data are for FDIC-insured institutions from 

Consolidated Reports of Condition and Income (Call Reports), with data beginning in 1984. This report defines the pre-pandemic level as fourth quarter 2019, 

unless noted otherwise.

3 For more information on the three bank failures that occurred between March and May 2023, see “Remarks by Chairman Martin J. Gruenberg on “Oversight of 

Financial Regulators: Financial Stability, Supervision, and Consumer Protection in the Wake of Recent Bank Failures” Before the Committee on Banking, Housing, 

and Urban Affairs, United States Senate,” May 18, 2023. 

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.1

The 2023 Risk Review provides an overview of banking 

conditions for 2022 through early 2023, including 

key developments that emerged from the stress in 

the banking sector in March 2023.2 The failure of 

three large banking institutions in March and May 

highlighted certain risks to the banking sector.3

The Risk Review presents key risks to banks in five 

broad categories—credit risk, market risk, operational 

risk, crypto-asset risk, and climate-related financial 

risk. The credit risk areas discussed are agriculture, 

commercial real estate, consumer lending, energy, 

housing, leveraged lending and corporate debt, 

nonbank financial institution lending, and small 

business lending. The market risk areas discussed 

are liquidity and deposits, and net interest margins 

and interest rate risk. The discussion of operational 

risk examines the potential negative impact to banks 

from cyber threats and illicit activity. Crypto-asset 

risk, a new section in the 2023 Risk Review, discusses 

the FDIC’s approach to understanding and evaluating 

crypto-asset-related markets and activities. Monitoring 

these risks is among the FDIC’s top priorities. The 

discussion of climate-related financial risk focuses on 

the physical risk of severe weather and climate events 

to the banking system.

Section 1 is an executive summary. Section 2 is an 

overview of economic, financial market, and banking 

industry conditions. Sections 3 through 7 include 

analysis of the key credit, market, operational, cryptoasset, and climate-related financial risks facing banks. 
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2023 Risk Review | 3

SECTION 1

Executive Summary

4 The banking failures included Silicon Valley Bank of Santa Clara, CA on March 10, 2023; Signature Bank of New York, NY on March 12, 2023; and First Republic 

Bank of San Francisco, CA on May 1, 2023.

The banking industry demonstrated resilience 

despite weaker economic conditions, sharply 

higher interest rates, high inflation, and financial 

market stress in early 2023. Stress in certain large 

banking institutions along with severe liquidity strains 

resulted in the failure of Silicon Valley Bank and 

Signature Bank in March and First Republic Bank in 

May.4 The FDIC, Federal Reserve, and Treasury took 

swift and decisive action to restore public confidence 

in the banking system, but banking conditions 

remained stressed and vulnerable to additional 

adverse market developments.

Weaker economic conditions and higher interest 

rates in 2022 continued through early 2023. The 

U.S. economy expanded at a markedly slower pace 

in 2022, with growth decelerating to less than half of 

the strong growth in 2021 and increased expectations 

for recession. Disruption to supply chains impeded 

economic growth in 2022. While these pressures 

abated and inflation moderated by early 2023, labor 

supply shortages remained. The economy has been 

supported by strong labor markets and continued 

growth in personal incomes, even as other sectors 

such as housing began to slow. 

Interest rates rose sharply in 2022 as the Federal 

Reserve raised short-term interest rates to combat 

sustained high inflation. Treasury yields rose across 

all maturities. Shorter-term interest rates rose more 

than longer-term interest rates, causing the yield curve 

to invert in 2022 and remain inverted at most tenors 

through first quarter 2023. An inverted yield curve 

makes lending conditions more challenging for banks. 

Financial market conditions tightened considerably 

starting in 2022 on rising interest rates, high 

inflation, and concerns over a potential recession.

Bond markets faced several challenges as rising 

interest rates and bond market volatility weighed on 

both new issuances and performance. Stocks generally 

performed worse in 2022 than in any year since 

2008. Although corporate earnings largely surpassed 

expectations in 2022, financial market conditions 

worsened throughout the year due to strong 

inflationary pressures and a tight labor market. The 

failure of three large banks, two in first quarter 2023 

and one in the second quarter, introduced a renewed 

bout of stress primarily in the banking sector. Financial 

market conditions stabilized to some degree by the 

end of first quarter, but interest rates and funding costs 

remained elevated.   

Despite these challenges and the market stress in 

early 2023, the banking industry demonstrated 

resilience, but industry performance moderated 

from 2022. Bank net income was roughly unchanged 

in first quarter 2023 after excluding accounting gains 

associated with the acquisition of two failed banks. 

Banking sector profitability moderated in 2022 

after strong gains in 2021 as increased provision 

and noninterest expenses offset higher net interest 

income. Net interest margins (NIMs) improved 

in 2022 as interest rates rose, but NIMs began to 

decline in first quarter 2023 as higher funding costs 

offset increased asset yields on an aggregate basis. 

Deposit outflow from the banking industry, which 

started in mid-2022, continued at a faster rate in first 

quarter 2023. However, asset quality metrics for the 

banking industry overall remained favorable through 

first quarter 2023, and the industry remained well 

capitalized. After surging in 2022, the volume of 

unrealized securities losses moderated in first quarter 

2023 but remained elevated. 
4 | 2023 Risk Review

Key Risks to Banks

Credit Risks: Asset quality remained generally 

favorable as of first quarter 2023 despite modest 

deterioration. Weaker economic conditions and 

higher interest rates may challenge bank loan 

portfolios, including credit card, commercial and 

industrial, residential real estate, and commercial 

real estate (CRE) loans. 

• Agriculture: The agricultural sector had another 

strong year with record profits despite widespread 

drought conditions. Loan growth and higher loan 

yields boosted farm bank earnings in first quarter 

2023 following a down year in 2022. Stronger farm 

sector financial conditions led to improved farm 

bank asset quality through first quarter 2023, but 

higher interest rates and production costs pose 

challenges in 2023. 

• Commercial Real Estate: Banks have substantial 

exposure to CRE lending as CRE loans comprised a 

quarter of total loans held by the banking industry 

as of first quarter 2023. CRE loans as a share of 

total industry assets have grown and approached 

their 2009 peak. Most CRE property types 

performed well in 2022, but some challenges 

continued into 2023, particularly among office 

properties. With a structural decline in office 

demand and weak rent growth, some borrowers 

may have difficulty refinancing. Longer-term 

leases, which are prevalent in the office sector, 

helped to insulate office properties from reduced 

occupancy earlier in the pandemic, but more 

office leases are scheduled to expire over the 

next three years in some large markets. While 

aggregate banking industry CRE asset quality 

metrics remained favorable in first quarter 2023, 

challenges to loan performance include higher 

interest rates, difficulty refinancing particularly 

for loans secured by some office properties, and 

economic uncertainty.

• Consumer Lending: Consumer debt increased, 

owing primarily to strong growth in credit card 

balances. While a strong labor market supported 

consumer incomes, consumers faced higher 

inflation that constrained budgets. Consumer 

savings declined, and declines in equity prices 

pressured some consumer balance sheets. 

Potential signs of consumer loan problems 

emerged at banks, as the total past-due rate on 

credit cards and auto loans rose. While asset 

quality remained generally favorable, trends in 

consumer loan performance could deteriorate 

in 2023 if the labor market or economic growth 

weakens. Auto loans in particular showed 

concerning asset quality trends that may worsen if 

auto prices normalize from high levels.  

• Energy: Energy prices softened during the second 

half of 2022 as oil prices receded from earlier 

highs and were more stable through early 2023. 

Despite the decline in prices, the energy industry 

remained profitable, supporting employment in 

energy-concentrated states. Bank loan exposure 

to oil and gas firms continued to decline in 2022 

from 2021 levels. Community bank asset quality in 

energy-concentrated states continued to improve 

through first quarter 2023. Despite strength in 

2022, the outlook for conditions in the energy 

sector weakened by year-end and remained 

uncertain in early 2023.  

• Housing: The housing market began to slow in 

mid-2022 as mortgage rates rose sharply. Through 

early 2023, home price appreciation declined from 

2022 highs. But home prices nationally remained 

elevated and above the pre-pandemic level, aided 

by strong demand and a limited supply of homes 

for sale. High home prices and increased mortgage 

rates continued to reduce the affordability of 

homes, particularly for first-time home buyers. 

With the sharp rise in long-term mortgage rates, 

mortgage originations declined last year and 

through first quarter 2023, but banks reported 

higher residential mortgage loan balances 

and increased residential construction and 

development lending. Asset quality metrics for 

residential mortgage loans remained favorable, 

but early signs of potential credit deterioration 

have emerged.
2023 Risk Review | 5

• Leveraged Lending and Corporate Debt:

Corporate borrowing conditions deteriorated 

in 2022 and through first quarter 2023 as high 

inflation, rising interest rates, and an economic 

slowdown challenged corporate borrowers. 

Corporate debt issuance slowed sharply. Issuance 

of leveraged loans, a subset of the corporate debt 

market, declined normalizing from the record 

issuance in 2021. Slowing economic growth and 

continued high interest rates could weigh on 

corporate debt markets and pose credit risk for 

the banking industry, while limited near-term 

corporate debt maturities should mitigate some 

risks. Rising corporate defaults would affect 

holders of corporate debt securities, including 

banks. 

• Nonbank Financial Institution Lending: Bank 

lending to nonbank financial institutions (NBFIs) 

continued to increase, led by growth in the larger 

banks. Community bank exposure to nonbank 

entities, primarily in the form of line of credit 

facilities to nonbank mortgage lenders, remained 

limited and declined through first quarter 2023, 

according to supervisory observations. The 

banking industry is increasingly exposed to the 

broad and varied risks from nonbank business 

activities. Asset quality of NBFI loans remained 

favorable in first quarter 2023, but banks remain 

vulnerable to adverse developments in nonbank 

institutions. 

• Small Business Lending: Small business 

conditions weakened from high inflation and 

labor market shortages. Conditions varied across 

industries as consumer spending patterns shifted 

toward services. Small business loans declined 

in 2022, primarily reflecting the winding down of 

lending under the Paycheck Protection Program. 

While asset quality remained sound, small 

businesses reported concerns about the weaker 

outlook, which may be a source of risk for banks 

during 2023. 

Market Risks: Market risks were primarily related to 

the effects of higher interest rates. Deposit outflows 

along with high levels of unrealized losses could 

pressure liquidity for some banks in 2023. The 

banking industry benefited from strong loan growth 

and higher NIMs in 2022, but higher funding costs 

reduced NIMs in early 2023. 

• Liquidity and Deposits: Higher unrealized losses 

made securities portfolios a less effective liquidity 

source. Deposit levels continued to grow among 

community banks in 2022 through first quarter 

2023 despite the overall decline in deposits for the 

banking industry. Community bank loan growth 

remained strong and outpaced deposit growth, 

causing liquid assets to contract and wholesale 

funding to increase. High interest rates remain a 

significant source of liquidity risk for banks.

• Net Interest Margins and Interest Rate Risk:

Higher interest rates initially supported higher 

NIMs, particularly as loan growth strengthened. 

These trends began to reverse in first quarter 

2023, as funding pressures rose and loan growth 

slowed. The sharp rise in interest rates in 2022 

caused widespread depreciation in securities 

portfolios, and banks with a higher share of 

long-term assets reported higher depreciation in 

investment portfolios and lower growth in NIMs 

than other institutions. 

Operational Risk: Operational risks, including 

cybersecurity risks and risks related to illicit financial 

activity, remained elevated across the banking 

industry.

• Operational risk remains one of the most critical 

risks to banks. Geopolitical events continue 

to increase the likelihood of cyber attacks 

on banks. The banking industry’s software 

infrastructure remains vulnerable to cyber attacks 

including ransomware attacks and threats against 

third-party service providers. Robust customer 

due diligence policies and anti-money laundering 

and countering the financing of terrorism 

programs reduce the U.S. financial system’s 

susceptibility to illicit financial activity risks. 
6 | 2023 Risk Review

Crypto-Asset Risk: Crypto-assets present novel and 

complex risks that are difficult to fully assess.

• The crypto-asset sector experienced significant 

market volatility in 2022. Growth in the cryptoasset industry corresponded with an increasing 

interest by some banks to engage in crypto-asset 

activities. The FDIC has been generally aware 

of the rising interest in crypto-asset-related 

activities through its normal supervision process. 

However, as this interest has accelerated, the FDIC 

determined that more information was needed to 

better understand the risks associated with these 

activities. The FDIC, in coordination with the other 

federal banking agencies, continues to closely 

monitor crypto-asset-related activities of banking 

organizations. As warranted, the FDIC will issue 

additional statements related to engagement by 

banking organizations in crypto-asset-related 

activities. The FDIC also has developed processes 

to engage in robust supervisory discussions with 

banking organizations regarding proposed and 

existing crypto-asset-related activities and provide 

case-specific supervisory feedback.   

Climate-Related Financial Risk: Climate-related 

financial risk includes physical risk and transition 

risk. The Risk Review is a retrospective look at risks, 

and the discussion in this section focuses on physical 

risk from severe weather and climate events.

• In 2022, severe weather and climate-related 

events included three hurricanes, an extensive 

wildfire, and a prolonged drought in the West. 

Estimated damages from severe weather and 

climate events in 2022 were among the most 

costly. The FDIC is expanding efforts to understand 

climate-related financial risk in a thoughtful 

and measured manner that emphasizes a riskbased approach and collaboration with other 

supervisors and the industry. The FDIC recognizes 

that risk management practices in this area are 

evolving and will continue to encourage banks to 

consider climate-related financial risk in a manner 

that allows them to prudently meet the financial 

services needs of their communities. 
2023 Risk Review | 7

SECTION 2

Overview of the Economy, Financial 

Markets, and Banking Industry

Economy

• The U.S. economy continued to expand in 2022 and first quarter 2023 but at a notably slower pace than in 

2021, and recession concerns increased.

• Labor markets remained strong, with higher growth in payroll employment and wages, but showed signs of 

moderating late in 2022 and into 2023.

• Inflationary pressures increased and supply chain issues continued, challenging businesses and 

consumers.

• Monetary policy tightened in response to inflation; higher market interest rates may weaken economic 

conditions and pose risks for banks.

5 Recessions in the United States are characterized by a broad-based decline in activity as determined by the National Bureau of Economic Research Business 

Cycle Dating Committee and include indicators for the labor market, consumer and business spending, industrial production, and incomes. 

6 Blue Chip economic forecasts included a special question on the odds of a recession from June to September that increased every month.

Economic growth slowed markedly in 2022, but 

the economy avoided a recession. Full-year growth 

was 2.1 percent in 2022, down from 5.9 percent in 

2021. The slowdown reflected a contraction in real 

gross domestic product (GDP) in the first and second 

quarters of 2022 (Chart 1). Despite these declines, 

an economic recession was not officially determined 

as other economic indicators were strong.5 The 

contraction during the first half of 2022 was due 

primarily to declines in exports and government 

spending. Inventory investment, mainly in retail trade 

and residential investment, also declined during the 

year. Economic growth turned positive in the second 

half of 2022 supported by government spending and 

a strong rebound in exports, particularly in energy. 

Continued growth in consumer spending also helped 

support economic growth. After peaking in third 

quarter 2022, economic growth slowed through first 

quarter 2023, when GDP increased at an annual rate 

of 1.3 percent. Consumer spending rose despite 

continued high inflation, while inventories and 

residential fixed investment declined. During 2022, 

professional forecasters increased the odds 

of a recession in the next 12 months, despite the 

economy’s positive growth in the third and fourth 

quarters. The odds of a recession beginning in 2023 

remained elevated.6

Supply chain bottlenecks continued to impede 

economic growth in 2022. While U.S. manufacturing 

output continued to grow since pandemic-related 

restrictions eased in 2021, producers continued to 

experience backlogs and long delivery times in 2022. 

These conditions resulted in higher producer prices, 

which contributed to increased prices overall last year. 

Other countries also continued to experience supply 

chain disruptions, including lockdowns in China 

that had ripple effects throughout global production 

chains. Slowing global demand in the final months of 

2022 brought backlogs and delivery times for domestic 

production closer to historical norms. Conditions 

improved further in first quarter 2023 as shipping costs 

and production delays continued to fall.
8 | 2023 Risk Review

CHART 1

Aer Contracting in the First Half of 2022, Growth Resumed at a Lower Pace

Source: Bureau of Economic Analysis (Haver Analytics).

Note: Data are quarterly through first quarter 2023.

Contribution to Change in GDP

Percent

-4

-3

-2

-1

0

1

2

3

4

5

6

Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023

Consumption

Private Investment

Government

Exports

Imports

Real Change in GDP

The labor market remained tight, and many 

industries continued to face labor market shortages 

last year as job openings reached an all-time high 

in first quarter 2022. While job openings remained 

historically elevated through first quarter 2023, 

labor market tightness began to ease. The ratio of 

unemployed workers to job openings remained 

below one and near historic lows, suggesting there 

are not enough workers available to fill all open 

positions in the economy (Chart 2). The labor force 

participation rate edged up but remained below its 

pre-pandemic level in each month of 2022 and the 

first three months of 2023 due to pandemic-related 

factors and retirements.7 The unemployment rate 

remained near historic lows during 2022 and through 

the first quarter of 2023, one of the many signs of 

continued labor market tightness. Payroll job growth 

remained solid, though the monthly average declined 

throughout last year. In July 2022, payroll employment 

surpassed the peak set in February 2020 before the 

onset of the COVID-19 recession. The pace of job gains 

varied among specific industries with some ending 

2022 well above pre-pandemic employment levels 

7 The pre-pandemic level is defined as February 2020 for this section on the economy.

from March and April 2020. Payroll growth continued 

in first quarter 2023, although at a slower pace than 

one year earlier. Wage growth remained strong in 2022 

and broadened across industries, but it subsided in 

the second half of the year. Wage growth slowed in 

first quarter 2023 but remains above levels consistent 

with the Federal Reserve’s target inflation, feeding into 

inflationary pressures.

Inflationary pressures continued to increase in 

the first half of 2022, reaching the highest levels 

in decades, but moderated through early 2023 

partly due to lower energy prices (Chart 3). The 

consumer price index (CPI) peaked at 9.1 percent in 

June 2022 and recorded the largest 12-month increase 

since November 1981. Inflation in the early months 

of 2022 was driven by an acceleration in food and 

energy prices. Energy prices remained high into early 

summer 2022 with gasoline peaking above $5 a gallon 

nationally before falling in the second half of the year. 

Annual core CPI, which excludes the more volatile 

categories of food and energy, also peaked last June 

at 5.9 percent. Increasing rents and rent equivalents 
2023 Risk Review | 9

Number of Unemployed Persons Per Job Opening

Source: Bureau of Labor Statistics (Haver Analytics). 

Note: Shaded areas indicate recession. Monthly data as of March 2023. 

CHART 2

Labor Markets Remain Tight and the Number of Unemployed Persons 

Per Job Opening Is Near Historic Lows 

0

1

2

3

4

5

6

7

8

9

10

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

Unemployed Persons Per Job Opening

Year-Over-Year Percent Change

Source: Bureau of Labor Statistics (Haver Analytics). 

Note: Shaded areas indicate recession. Monthly data as of March 2023. 

CHART 3

Both Headline and Core Consumer Price Index Peaked in Mid-2022 

at Multi-Decade Highs and Remain Elevated

-4

-2

0

2

4

6

8

10

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

CPI Core CPI
10 | 2023 Risk Review

in the second half of the year added to inflationary 

pressures for shelter, a core component of CPI. Prices 

for many other categories that contributed the most 

to inflation moderated in first quarter 2023. However, 

inflation remained well above the Federal Reserve’s 2 

percent target in early 2023.

In response to sustained high inflation and a strong 

labor market, the Federal Reserve Federal Open 

Market Committee (FOMC) tightened monetary policy 

at seven of eight FOMC meetings held in 2022—every 

meeting but January. The 75 basis point hike in the 

federal funds rate in June 2022 was the largest onemonth increase since 1994 (Chart 4). The federal funds 

rate ended December 2022 in a range of 4.25 to 4.5 

percent, up from 0 to 0.25 percent at the start of the 

year. Rate hikes continued in February and March 

2023 and ended first quarter in a range of 4.75 to 5.0 

percent. The FOMC also ceased net asset purchases in 

early March 2022 and began reducing its 

securities holdings in June, which further contributed 

to tighter financial conditions. The Federal Reserve 

communicated its commitment to doing whatever 

necessary to restore price stability and maintain a 

strong labor market. 

As the federal funds rate increased, shorter-term 

interest rates rose more than longer-term interest 

rates, and interest rate spreads between shorter- and 

longer-dated bonds fell. The Treasury yield curve 

inverted in July 2022 and remained inverted at most 

tenors for the rest of 2022 and into 2023. An inverted 

yield curve often heightens discussion of whether 

a recession will occur soon, as the yield curve has 

inverted before almost every recession since World 

War II. Even without a recession, an inverted yield 

curve makes lending conditions more challenging for 

banks. 

Federal Funds Target Rate

Percent

Source: Federal Reserve Board (Haver Analytics).

Note: Data point to lower limit of federal funds target rate. Quarterly data as of March 2023. 

CHART 4

The Federal Reserve Began Increasing the Federal Funds Rate in March 2022 

and Hiked Rates at Each Subsequent Meeting 

0

1

2

3

4

5

6

7

8

9

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023
2023 Risk Review | 11

Prolonged inflationary pressures and higher 

interest rates challenge economic conditions and 

may pose risks to banks. While higher interest rates 

may improve earnings for some lenders, weaker 

economic conditions could slow demand for business 

and consumer credit and impede asset quality. 

Industries vulnerable to higher interest rates, such 

as autos and housing, could weaken; new business 

formations could slow; and household and business 

spending could decline. As highlighted in the FDIC’s 

2022 Risk Review, higher inflation could pose credit 

risks to some lenders if borrowers cannot stay current 

on loans due to higher prices, particularly if household 

incomes do not keep pace with rising expenses or if 

businesses face declining sales due to a reduction in 

consumer spending. These conditions may contribute 

to a more challenging operating environment for 

banks throughout 2023.
12 | 2023 Risk Review

Financial Markets

• Financial market conditions began to tighten considerably in 2022 as interest rates rose sharply and 

concerns about the economic outlook grew.

• Bond markets faced several challenges in 2022 as higher interest rates and volatility weighed on both new 

issuances and performance. While bond market volatility persisted in early 2023, performance improved 

and issuance picked up relative to much of 2022.

• Equity market volatility rose in 2022, and equity prices declined for banking stocks in early 2023. 

• While financial market conditions contributed to banking stress in early 2023, broader financial markets 

were largely unaffected by bank failures.

• Financial market conditions stabilized to some degree by the end of first quarter 2023, but interest rates 

and funding costs remained elevated.

Interest rates began to rise sharply in 2022, 

exceeding market expectations. Several major 

central banks increased interest rates to combat 

inflation in 2022, with the Federal Reserve raising 

short-term interest rates more aggressively than at 

any time in the past 40 years. The 425 basis point 

increase in the target range for the federal funds rate in 

2022 was far higher than the 100 basis point increase 

markets expected at the beginning of the year (Chart 

5). Along with rate increases, the Federal Reserve 

began to significantly reduce its balance sheet in June 

2022, and the Federal Reserve’s asset holdings fell 

$364 billion by the end of the year. The reduction in the 

Federal Reserve’s asset purchases further contributed 

to rising market interest rates.

Rates across the U.S. Treasury yield curve 

increased, and portions of the curve inverted in 

2022. Treasury yields rose sharply in 2022, with the 

two-year Treasury yield rising 368 basis points to 4.41 

percent and the ten-year yield rising 236 basis points 

to 3.88 percent (Chart 6). Other maturities on the 

Treasury yield curve increased at a similar rate. Much 

of the yield curve was inverted in the second half of 

2022, meaning yields on shorter-term securities were 

higher than yields on longer-term securities. The twoyear Treasury yield was higher than the ten-year yield 

from July through the end of the year, exceeding the 

ten-year yield by as much as 84 basis points in early 

December and by 107 basis points on March 8, 2023. 

Real interest rates, which exclude the component of 

yields that reflect inflation expectations (as measured 

by yields on Treasury Inflation-Protected Securities), 

also moved significantly higher in 2022. 

Despite federal funds rate increases that continued 

through at least May 2023, rates across U.S. Treasury 

yields did not sustain a comparable increasing trend 

from October 2022 through May 2023. Yields decreased 

during the market stress that occurred in March 2023. 

Treasury volatility heightened in the spring of 2023 as 

traders weighed expectations for persistent inflation, 

which tends to increase rates, against expectations for 

an economic slowdown, which has the opposite effect.

Rising interest rates, inflation, and a potential 

recession all contributed to financial market stress 

in 2022. Financial asset prices dropped substantially 

across most asset types in 2022. Globally, stocks and 

bonds lost more than $30 trillion in a year marked 

by sustained periods of heightened volatility. Even 

commodity prices, which initially added to inflation 

and caused interest rates to rise, fell significantly in 

the second half of 2022. Prices of many financial assets 

began to rebound in fourth quarter 2022 and into first 

quarter 2023. Overall, financial market conditions 

stabilized to some degree by the end of first quarter 

2023, but interest rates and funding costs remained 

elevated. 

The corporate bond market began to face several 

challenges in 2022 as rising interest rates and bond 

market volatility weighed on both new issuances 

and performance. While bond market volatility 

persisted in early 2023, performance improved 

and issuance picked up relative to much of 2022. 

Investment grade issuance fell 16.2 percent year over 

year in 2022 on a dollar basis, down for the second 

consecutive year. High-yield bond issuance fell 77.0 

percent year over year, down from record issuance in 
2023 Risk Review | 13

CHART 6

Interest Rates Across the U.S. Treasury Curve Increased in 2022

Source: Federal Reserve Board (Federal Reserve Economic Data).

Note: Data are daily through May 11, 2023.

Yield

Percent

0

1

2

3

4

5

Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23

10-Year Treasury Yield

2-Year Treasury Yield

The 2-year Treasury yield exceeded the 

10-year Treasury yield by as much as 84 

basis points in early December 2022 and 

by 107 basis points on March 8, 2023.

Yield

Percent

Sources: Bloomberg and Federal Reserve (Federal Reserve Economic Data).

Note: Market expectations for the federal funds rate are derived from the 30-day federal funds futures contract price in which the implied 

rate is 100 minus the futures price. Data are monthly through February 2023. 

CHART 5

The Actual Path of the Eective Federal Funds Rate in 2022 Exceeded Market 

Expectations 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Dec-22 Feb-23

Market expectations as of 

September 30, 2022 

Actual path of the eective 

federal funds rate 

Market expectations 

as of June 30, 2022 

Market expectations 

as of March 31, 2022 

Market expectations for the federal funds 

rate as of December 31, 2021 
14 | 2023 Risk Review

2021, as recessionary fears and rising interest rates 

dampened investor appetite. Yields on corporate 

bonds rose significantly in 2022, resulting in negative 

investment performance for both investment grade 

and high-yield corporate bonds. Investment grade 

bonds produced a total return of negative 15.4 percent 

in 2022, and high-yield bonds managed a total return 

of negative 11.2 percent.8 Corporate bond spreads 

also rose. The ICE BofA Single-A U.S. Corporate Index 

Option-Adjusted Spread rose 36 basis points, and the 

BBB U.S. Corporate Index Option-Adjusted Spread rose 

51 basis points during the year (Chart 7). Despite rising 

spreads, default rates for corporate bonds did not 

worsen in 2022 and ended the year at 2.0 percent, well 

below the 4.7 percent long-term average. Continued 

consumer spending, a low unemployment rate, solid 

corporate earnings, and ample liquidity helped keep 

default rates low over the year. In first quarter 2023, 

corporate bond issuance increased relative to fourth 

quarter 2022 but was down 14.9 percent year over year.

8 Investment grade bond results as measured by the ICE BofA U.S. Corporate Index. High-yield bond results as measured by the ICE BofA U.S. High Yield Index.

The municipal bond market experienced a selloff and closed 2022 at $4.0 trillion outstanding, 

roughly the same size as in 2021. Municipal bond 

prices decreased in 2022, with the Bloomberg 

Municipal Bond Index down 8.5 percent for the year. 

New issuances for municipal bonds declined 21.3 

percent in 2022 from 2021 issuance levels. Higher 

interest rates created significant challenges for raising 

new debt or refinancing existing debt. A decline in 

taxable municipal bond sales, which are particularly 

sensitive to higher interest rates, also drove the drop 

in issuances. Municipal bond funds experienced 

significant outflows in 2022 as municipal retail 

investors pulled their money to stem losses. In fourth 

quarter 2022, the lack of new issuances and easing 

concerns over inflation helped to soften some of the 

selling pressures, resulting in the municipal bond 

market recovering more than a third of its losses by 

year-end. Despite a recovery in prices, municipal bond 

issuance remained subdued in first quarter 2023.

Spread

Percent

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

Note: Data are daily through May 12, 2023.

CHART 7

The Spread Between Corporate Bond Yields and Benchmark Interest Rates 

Increased in 2022 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 May-23

In 2022, corporate bond spreads 

remained low relative to the 

pandemic-related spike of March 2020.

Option-adjusted spread for

BBB-rated corporate bonds

Option-adjusted spread for

Single-A-rated corporate bonds

Corporate bond spreads trended 

upward for most of 2022, 

peaking in October.
2023 Risk Review | 15

Commodity prices moderated in 2022 after rising 

earlier in the year and continued to decline in 

first quarter 2023. Commodity prices increased 8.7 

percent in 2022 but were volatile early in the year. 

Driven by booming demand, commodity prices were 

already rising in 2022, and fears of supply shortages 

from the war in Ukraine caused the trend to accelerate. 

Commodity prices increased 45.9 percent through 

early June 2022 but declined 25.5 percent from June 

9 through the end of last year. The price pattern of 

peaking in the first half of 2022 and declining through 

the first quarter 2023 was consistent across a variety of 

commodities, including oil, grains, industrial metals, 

and lumber.

Stocks generally performed worse in 2022 than 

in any year since 2008 but began to rebound in 

October 2022 and continued on an upward trend 

through first quarter 2023. The Standard and Poor’s 

(S&P) 500 Index ended 2022 with a total return of 

negative 18.1 percent. The Dow Jones Industrial 

Average reported a total return of negative 6.9 percent, 

and the NASDAQ reported a total return of negative 

32.5 percent. Although corporate earnings largely 

surpassed expectations in 2022, financial market 

conditions worsened throughout the year due to 

inflationary pressures and a tight labor market. Stocks 

largely rebounded in early 2023, while stock market 

volatility declined.

Bank stock performance was similar to the broader 

market in 2022 despite higher interest rates, but 

bank stocks declined in early 2023 following bank 

failures. The KBW Bank Index, which consists of 24 

national U.S. money centers and regional banks, 

ended 2022 with a total return of negative 21.4 

percent. The KBW Bank Index lagged the S&P 500 

for most of the year despite starting the year strong. 

The S&P Financials Sector Index, which reflects 67 

constituents of the S&P 500, had a total return of 

negative 10.5 percent. The S&P Financials Sector Index 

mirrored the performance of the S&P 500 for most of 

2022 but outperformed during the fourth quarter’s 

bear market rally.

Bank stock performance diverged from the broader 

market following the failures of Silicon Valley Bank 

and Signature Bank of New York in March 2023. The 

KBW Bank Index had a total return of negative 25.1 

percent year-to-date through May 15, 2023, while 

the S&P Financial Sector Index had a total return of 

negative 5.6 percent over the same period. Some bank 

stock prices declined in excess of 50 percent from 

early March through early May. While broader financial 

market conditions stabilized in early 2023, financial 

market conditions for banks remained tight. 
16 | 2023 Risk Review

Banking Industry

• The banking industry was resilient in first quarter 2023, with high net income even after a period of stress 

and adjusting for one-time acquisition gains.

• Net interest income and net interest margin (NIM) substantially increased in 2022 as market rates rose, but 

higher funding costs amid shifts in deposit flows and intensified competition for deposits led to a decline in 

NIM in first quarter 2023.

• Community banks reported lower net income in first quarter 2023 from the prior quarter. Despite NIM 

compression, community banks continued to report a higher NIM than the banking industry overall.

• Unrealized losses on securities portfolios declined in first quarter 2023 from 2022 highs but remained a 

significant risk to bank liquidity and access to funding sources.

• After strong loan growth across several portfolios in 2022, loans held by the banking industry declined 

slightly in first quarter 2023. 

• Despite modest weakening, overall asset quality metrics remained favorable through first quarter 2023; 

however, the banking industry continued to face key downside risks. 

9 On March 8, 2023, Silvergate Bank announced its intent to self-liquidate. On March 10, 2023, Silicon Valley Bank (SVB) was closed by the California Department 

of Financial Protection and Innovation (CADFPI). Contagion effects from SVB’s failure began to spread through traditional media, social media, and short sellers 

to other banks with perceived similar risk characteristics, notably those with high levels of uninsured deposits, concentrations of customers in the venture capital 

and tech industries, and high levels of unrealized losses on securities. Contagion effects initially manifested in large declines in stock prices and then in deposit 

outflows at certain other banks. For two of these banks—Signature Bank and First Republic Bank—deposit outflows became deposit runs and exposed other 

weaknesses that could not be overcome, leading to their failure. On March 12, 2023, Signature Bank of New York was closed by the New York State Department of 

Financial Services (NYSDFS). On May 1, 2023, First Republic Bank was closed by the CADFPI. 

10 Noninterest expense rose 5.4 percent, primarily due to rising labor costs and higher advertising and marketing expenses, as noninterest income fell 3.1 percent 

due to lower net gains on loan sales.

Despite the period of stress in early 2023, the 

banking industry was resilient.9 Net income for 

the first quarter remained high even after excluding 

accounting gains associated with the acquisition 

of two failed banks during the quarter (Chart 8).

Quarterly net income in first quarter 2023 grew 16.9 

percent from fourth quarter 2022; excluding the effects 

on incomes of the acquirers of the two failed banks, 

quarterly net income for the industry was roughly 

the same as in the prior quarter. Strong growth in 

noninterest income more than offset the effects of 

lower net interest income and increased noninterest 

expense. 

Net income for community banks declined 4.2 percent 

in first quarter 2023 from the prior quarter in large 

part due to lower net interest income and noninterest 

income. These declines more than offset the benefit of 

decreased provision and lower noninterest expenses. 

Community bank quarterly NIM improved on an 

annual basis in first quarter 2023 but declined from 

the prior quarter. The rising cost of deposits quarter 

over quarter more than offset an increase in yields 

on assets and constrained community bank NIM. In 

first quarter 2023, net income reported by community 

banks increased 6.1 percent from the year-earlier 

quarter, driven by higher net interest income. Higher 

interest rates benefited community bank earnings 

through most of 2022 before the meaningful rise in 

funding costs during first quarter 2023, which more 

than offset yield gains.

Banking industry results for first quarter 2023 included 

only the first few weeks of the banking stress that 

began in early March and continued after the quarter’s 

end. As a result, this year’s first quarter earnings 

did not fully capture the effects of the industry’s 

response to that stress, which continued into the 

second quarter. Changes in flows and competition for 

deposits, as well as lending conditions and reliance 

on more expensive funding sources, will influence 

banking conditions through the rest of 2023.

Net income for the banking industry in 2022 was 

lower than in 2021, as higher provision expense 

and noninterest expense offset improved net 

interest income.10 Industry net income fell 5.8 percent 

to $263.0 billion in 2022 but remained above pre-
2023 Risk Review | 17

pandemic averages (Chart 8).11 Provision expense, the 

amount set aside by institutions to protect against 

future credit losses, rose $82.6 billion, from negative 

$31.0 billion in 2021 to positive $51.6 billion in 2022. 

Provision expenses increased as loans grew and 

concerns about the economic outlook increased. Preprovision net revenue, a measure of core profitability, 

rose 21.7 percent because of substantial growth in 

net interest income.12 In 2022, both pre-provision net 

revenue and net interest income reached record highs 

since data collection began in 1984. 

Community banks also reported marginally lower 

net income in 2022, down 0.3 percent to $30.4 billion, 

as higher net interest income did not offset lower 

noninterest income, higher noninterest expense, 

realized losses on securities, and higher provision 

expense.13 Similar to the banking industry overall, preprovision net revenue among community banks rose 

on strong growth in net interest income. 

Rising interest rates contributed to record gains in 

NIM for both the banking industry and community 

banks in 2022, but NIMs compressed in first quarter 

2023 as competition for deposits increased funding 

costs. Net interest income grew 20.0 percent in 2022 

as strong growth in interest income outpaced growth 

in interest expense. In 2022, the full-year industrywide NIM expanded 41 basis points to 2.95 percent, 

the largest annual expansion since data collection 

began in 1984 (Chart 9). Net interest income grew 12.9 

percent for community banks, while full-year NIM rose 

17 basis points to 3.45 percent, the largest annual 

expansion for community banks since 1992. In first 

quarter 2023, community banks continued to report 

higher NIMs than the overall banking industry.

Significant growth in net interest income also drove 

the reduction in the efficiency ratio for the banking 

industry to 53.02 in first quarter 2023, down from 

57.71 in 2022 and 61.15 in 2021.14 From a year earlier, 

the industry’s NIM rose 77 basis points in the first 

quarter but fell 7 basis points from fourth quarter 

2022. Despite the decline, the banking industry’s NIM 

of 3.31 percent in first quarter 2023 remained above its 

11 The “pre-pandemic average” refers to the period first quarter 2015 through fourth quarter 2019.

12 Pre-provision net revenue is calculated as net interest income plus noninterest income minus noninterest expense; it excludes expenses related to goodwill.

13 Noninterest income decreased 15.8 percent, while noninterest expense increased 5.3 percent.

14 Efficiency ratio is noninterest expense as a percentage of net interest income plus noninterest income. The reduction in this ratio indicates that banks were 

more efficient in producing revenue.

pre-pandemic average of 3.25 percent. In first quarter 

2023, NIM declined for banks of all asset size groups 

from the prior quarter, except banks with total assets 

less than $100 million. The decline in NIM reflects 

the cost of deposits (i.e., the interest banks pay on 

deposits) rising at a faster rate than yields on loans 

(i.e., the interest banks charge on loans), a reversal 

of the trend experienced in 2022 when yields on 

loans increased at a faster rate than cost of deposits. 

During first quarter 2023, banks reported increased 

competition for deposit funding from banks and 

other sources. There was also a shift in deposits from 

transaction and savings accounts, typically loweryielding accounts, to time deposits, such as certificates 

of deposit, which historically pay higher interest rates 

than traditional savings accounts.

Total industry deposits declined for the fourth 

consecutive quarter through first quarter 2023. In 

2022, deposits fell 2.5 percent, the largest year-end 

decline on record. While this reduction offset to some 

extent the unprecedented growth in deposits reported 

during the pandemic, total deposits remained 

elevated at the end of last year. The banking stress 

experienced in first quarter 2023 accelerated the 

outflow of deposits from the banking system, causing 

total deposits to decline at a record rate on a quarterly 

basis (down 2.5 percent) and on an annual basis 

(down 6.0 percent) early this year. Total deposits were 

$18.7 trillion in first quarter 2023, as the reduction in 

uninsured deposits (down 8.2 percent) outpaced the 

growth in insured deposits (up 2.5 percent). However, 

total deposits for community banks slightly increased 

0.5 percent as growth in insured deposits (up 3.7 

percent) outpaced the decline in uninsured deposits 

(down 6.3 percent). (See the Market Risk—Liquidity 

and Deposits section of this report for more analysis of 

deposit shifts across bank asset groupings.)
18 | 2023 Risk Review

CHART 9

Full-Year Net Interest Margins Rebounded and Significantly Widened in 2022

Source: FDIC.

Note: Annual data as of fourth quarter 2022.

Net Interest Margin

Percent

2.50

2.75

3.00

3.25

3.50

3.75

4.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Community Banks (3.45 percent)

Industry (2.95 percent)

CHART 8

Quarterly Net Income Remained High in First Quarter 2023

Source: FDIC.

Note: Quarterly data as of first quarter 2023. Net income was roughly flat over the quarter aer excluding acquisition gains.

$ Billions

-60

-40

-20

0

20

40

60

80

100

2008 2008 2009 2010 2011 2011 2012 2013 2014 2014 2015 2016 2017 2017 2018 2019 2020 2020 2021 2022 2023
2023 Risk Review | 19

CHART 10

Unrealized Losses Remained Elevated Through First Quarter 2023

Source: FDIC.

Note: Data as of first quarter 2023. Data for 2008-2022 are annual and as of December 31. Data for 2023 is as of March 31. Unrealized losses 

on securities solely reflect the dierence between the market value as of quarter-end and the book value of non-equity securities.

$ Billions Percent

0

4

8

12

16

20

24

28

32

36

40

-700

-600

-500

-400

-300

-200

-100

0

100

200

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Unrealized Gains (Losses) (Le Axis)

Core Capital Leverage Ratio (Right Axis)

Liquid Assets as a Percent of Total Assets (Right Axis)

Higher interest rates coupled with longer asset 

maturities may present challenges to the banking 

industry. The banking industry’s share of longerterm loans and securities relative to assets increased 

to 39.7 percent in 2022 before declining to 38.5 

percent in first quarter 2023.15 Community banks also 

reported a slight decline in first quarter from the prior 

quarter, from 54.7 percent of total assets, a recent 

high, to 53.9 percent of total assets. Despite the slight 

decline, both industry and community banks’ share 

of longer-term assets to total assets remained above 

the pre-pandemic level in first quarter 2023. (See the 

Market Risk—Net Interest Margins and Interest Rate 

Risk section of this report for more information on the 

effects of long-term assets to total assets on bank NIM 

performance.)

Although the higher level of longer-term loans and 

securities helped preserve NIMs during a period of 

lower interest rates, unrealized losses remained high 

15 Longer-term loans and securities have maturities greater than three years.

16 Unrealized losses on securities reflect the difference between the market value as of quarter-end and the book value of non-equity securities. 

in the first quarter and could continue to pressure 

industry earnings (Chart 10). In first quarter 2023, 

unrealized losses on securities declined to $515.5 

billion, down 16.5 percent from $617.8 billion in 

fourth quarter 2022.16 The decline was primarily due 

to declines in medium- and long-term market interest 

rates in the first quarter. Unrealized losses present a 

significant risk should banks need to sell investments 

and realize losses to meet liquidity needs. 

While the banking industry was well capitalized at 

year-end 2022 and in first quarter 2023, continued 

depreciation of bank investment portfolios may 

negatively affect capital if banks are forced to 

sell investments at a loss to meet liquidity needs. 

Depreciation of the investment portfolio could 

also adversely affect the ability of banks to pledge 

collateral or meet margin requirements when seeking 

access to wholesale or other sources of alternative 

funding. As noted at the outset of this report, liquidity 
20 | 2023 Risk Review

risks came to the fore for some banks in March 2023. 

In response, the FDIC, Federal Reserve, and Treasury 

took steps to protect the economy by strengthening 

public confidence in the banking system.17 To address 

funding issues arising from lower collateral values, 

banks utilized the Federal Reserve’s liquidity facilities, 

including the new Bank Term Funding Program (BTFP), 

with borrowing rising to $64.6 billion as of March 31, 

2023.18

After reporting strong loan growth in 2022, banking 

industry loan balances declined slightly in first 

quarter 2023. Total loans for the industry grew 8.7 

percent in 2022 and 9.6 percent net of Paycheck 

Protection Program (PPP) loans (Chart 11). The loan 

growth rate without PPP loans last year was double 

the industry’s average annual growth rate for the fiveyear period preceding the pandemic. Commercial and 

industrial loans, 1–4 family residential mortgages, and 

consumer loans represented the largest share of loan 

17 See the remarks cited in footnote 3 of this report. Also see FDIC, “Joint Statement by the Department of the Treasury, Federal Reserve, and FDIC,” press release, 

March 12, 2023; and Board of Governors of the Federal Reserve System, “Federal Reserve Board Announces It Will Make Available Additional Funding to Eligible 

Depository Institutions to Help Assure Banks Have the Ability to Meet the Needs of All Their Depositors,” press release, March 12, 2023. 

18 The BTFP provides qualified institutions with eligible securities the ability to access longer-term (one year) funding at par, which should alleviate the need 

to sell those securities at a loss in times of stress, as happened at Silvergate Bank and SVB. For more information, see https://www.federalreserve.gov/

monetarypolicy/bank-term-funding-program.htm.

growth in 2022. Construction and development loans 

increased for both community and noncommunity 

banks during 2022 but represented a smaller share of 

total industry loans. Community banks reported 14.4 

percent total loan growth in 2022 and 16.2 percent net 

of PPP loans.

In first quarter 2023, banking industry loans declined 

modestly (down 0.1 percent), reflecting loans 

transferred to the FDIC as receiver and the seasonal 

decline in credit card loan balances (down 2.6 

percent). Excluding the loans transferred out of the 

banking system to the FDIC, total loans increased 

modestly (up 0.4 percent) quarter over quarter, led 

by increased 1–4 family residential mortgages and 

loans to nondepository institutions. (See the Credit 

Risk—Housing and Nonbank Financial Institutions. 

Lending sections of this report for more information.) 

Community banks reported stronger loan growth than 

the banking industry as a whole in first quarter 2023, 

CHART 11

Annual Change in Loan Balances Was Driven by C&I Loans

Source: FDIC.

Note: Data as of fourth quarter 2022. Loan portfolios are presented from leto right in descending order of annual dollar growth."PPP" is 

Paycheck Protection Program, "C&I" is commercial and industrial, "NFNR" is nonfarm nonresidential, and "C&D" is construction and development.

Percent

9 10 10

14

10 10

8

17

14

16

5

18

16

29

14

24

0

3

6

9

12

15

18

21

24

27

30

33

Total Loans Total Less

PPP Loans

C&I C&I Less PPP

Loans

1-4 Family Consumer

Loans

NFNR C&D

Industry

Community Banks
2023 Risk Review | 21

CHART 12

Asset Quality Indicators Remain Favorable

Source: FDIC.

Note: Annual data as of fourth quarter 2022.

Noncurrent and Net Charge-ORate

Percent

Coverage Ratio

Percent

0

25

50

75

100

125

150

175

200

225

0

1

2

3

4

5

6

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Noncurrent Loan and Lease Rate (Le Axis)

Net Charge-ORate (Le Axis)

Coverage Ratio (Right Axis)

up 1.8 from the previous quarter and 15.0 percent from 

first quarter 2022. Growth in real estate loans, nonfarm 

nonresidential, and 1–4 residential mortgages fueled 

the growth. Recent surveys indicate that loan demand 

may be waning and underwriting standards are 

tightening, which may hinder loan growth rates in 

coming quarters.19

Despite a modest rise in noncurrent and net 

charge-off rates, asset quality indicators remained 

favorable through first quarter 2023. After rising 

slightly at the end of 2022, the early-stage past-due 

rate (loans and leases 30 to 89 days past due) declined 

slightly in first quarter 2023 to 0.52 percent, in part 

a reflection of seasonal improvement in auto loans 

and lower delinquencies on 1–4 family residential 

mortgages. The total early-stage past-due loan rate 

remained below the pre-pandemic average of 0.66 

percent. The noncurrent loan rate for the banking 

industry increased 2 basis points in first quarter 2023 

19 Board of Governors of the Federal Reserve System, Senior Loan Officer Opinion Survey on Bank Lending Practices, April 2023.

20 Data collection began in 1984.

to 0.75 percent but was still well below the high of 

5.44 percent at year-end 2009. The net charge-off rate 

increased to 0.41 percent from 0.36 percent at the end 

of 2022 (Chart 12). The coverage ratio for the industry, 

which compares the amount of loan-loss reserves to 

total noncurrent loans, increased to 219.5 percent in 

first quarter 2023, the highest level on record.20 While 

aggregate delinquency measures remained low among 

banking industry through first quarter, commercial 

real estate lenders face challenges, particularly among 

loans backed by office properties in some large, urban 

markets should conditions continue to weaken this 

year. (See the Credit Risk—Commercial Real Estate 

section of this report for more information.)

In 2022, community banks also reported a modest 

increase in early-stage loan delinquencies as the earlystage past-due rate rose 3 basis points to 0.36 percent. 

The noncurrent loan rate decreased 14 basis points in 

2022 to 0.44 percent, the lowest level for community 
22 | 2023 Risk Review

banks on record. In first quarter 2023, the early-stage 

past-due rate and noncurrent loan rate rose by 1 basis 

point. The net charge-off rate fell 2 basis points to 0.09 

percent. Community banks also reported a coverage 

ratio of 272.9 percent in first quarter 2023, slightly 

lower than the record high of 274.2 percent in fourth 

quarter 2022. 

While the banking industry was resilient through 

first quarter 2023, the industry continues to face 

significant downside risks in 2023. The banking 

industry continued to face considerable risks in early 

2023 after several bank failures and industry stress. At 

year-end 2022, the FDIC’s “Problem Bank List” was at a 

record low 39 institutions since data collection began 

in 1984. The number of problem banks increased 

21 Banks on the FDIC’s Problem Bank List have a CAMELS composite rating of “4” or “5” due to financial, operational, or managerial weaknesses, or a combination 

of such issues. The number of banks on the list increased by four from the previous quarter, reflecting movement from banks coming on and off the list.

to 43 in first quarter 2023, still low by historical 

standards.21 Two banks failed in first quarter 2023, with 

a subsequent failure in May 2023. These were the first 

failures since October 2020. 

As first quarter 2023 came to an end, risks to bank 

performance included the effects of inflation, 

rising market rates, slower economic growth, and 

geopolitical uncertainty. Collectively, these risks 

could pressure industry earnings, result in slower loan 

growth and deterioration in asset quality, and lead to a 

return to more normalized metrics from pre-pandemic 

periods. The FDIC is focused on monitoring banking 

industry conditions, including the effects of bank 

failures on overall banking conditions and stability. 
2023 Risk Review | 23

SECTION 3

Credit Risks

Agriculture 

• The agricultural sector earned record profits in 2022 despite widespread drought conditions. Farm income 

is forecast to decline in 2023 due to higher interest rates and rising expenses but remain above its longterm average.

• Loan growth and higher loan yields boosted farm bank earnings in first quarter 2023 following a down year 

in 2022.22 Liquidity ratios at farm banks declined from previous highs but remained above the ten-year 

average.

• Stronger farm sector financial conditions led to improved farm bank asset quality through first quarter 

2023, but higher interest rates and production costs pose challenges. 

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

There were 1,015 farm banks comprising more than one-fih of all banks as of first quarter 2023.

All but 11 of these banks are also considered community banks by the FDIC’s definition (see Glossary

of Terms). In first quarter 2023, agricultural loans held by all banks totaled $183.6 billion. 

Source: FDIC. 

Regional Exposure to Agricultural Lending

Dots on the map represent the 220 banks with total agricultural loans above 300 percent of capital. 

• Community banks hold 69 percent ($127 billion) of total agriculture loans.

• More than 20 percent of farm banks (220 banks, or 4.7 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 agriculture lending is concentrated in the Midwest.
24 | 2023 Risk Review

The agricultural sector earned record profits in 

2022 despite widespread drought conditions. The 

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

2022 net farm income rose 15.5 percent year over year 

to $162.7 billion, a record high on an inflation-adjusted 

basis.23 Growth in crop and livestock revenues more 

than offset higher production expenses and lower 

government payments (Chart 13).24 Higher commodity 

prices drove nearly all of the increase in crop and 

livestock revenue. Prices for various crops climbed to 

record or near-record highs in the first half of 2022 as 

the war in Ukraine and the U.S. drought caused supply 

challenges.25 Prices retreated through first quarter 

2023 but remained relatively high for corn, soybeans, 

and wheat.

During 2022, the share of the nation in moderate or 

worse drought conditions neared the share recorded 

during the historically severe drought in 2012 

(Chart 14).26 Poor pasture conditions from drought 

contributed to herd liquidation for many cattle 

producers, which boosted cattle prices.27 In addition, 

the price of poultry and eggs rose considerably in 2022 

after an outbreak of bird flu, which was the nation’s 

most severe on record.28 

Farm income is forecast to decline in 2023 due 

to higher interest rates and rising expenses but 

remain above its long-term average. The USDA 

forecast indicates that farm income will decline nearly 

16 percent in 2023 from the 2022 level.29 Factors 

expected to reduce income include higher interest 

costs, production costs, and higher purchase costs for 

livestock and poultry, combined with lower commodity 

prices.30 Nonetheless, farm income is projected to 

remain 20.8 percent above the prior 20-year average.

23 See USDA, 2023 Farm Sector Income Forecast, February 7, 2023. The 2022 forecast will become an estimate with the USDA’s next forecast release scheduled for 

August 31, 2023.

24 According to the USDA, crop and livestock receipts increased $88.7 billion, while production expenses rose $52.6 billion in 2022. This was the largest nominal 

year-over-year increase in production expenses on record.

25 For example, wheat prices received by farmers increased 27 percent during the first five months of 2022. Corn and soybean price swings mirrored those of 

wheat. A decline in the sunflower supply pressures substitutes including soybeans. 

26 See the Climate-Related Financial Risk section of this report for more information on U.S. drought conditions in 2022.

27 A survey conducted in late 2022 by the Farm Bureau found that 61 percent of respondents reported selling off portions of their herd, with an average reduction 

of 33 percent. As of January 1, 2023, the USDA reports that cattle inventories declined 3.6 percent from a year earlier, the largest decline since 1986.

28 According to the USDA, 57.8 million birds were affected by bird flu in 2022, surpassing the previous record of 50.5 million in 2015. The outbreak has continued in 

2023, although at a slower pace, with an additional nearly 1 million birds affected from January 1, 2023, through the end of May 2023. As the bird flu outbreak has 

slowed, egg prices have declined in first quarter 2023, falling more than 20 percent from fourth-quarter 2022 levels. However, prices are still well above historical 

prices.

29 See USDA, 2023 Farm Sector Income Forecast. 

30 The USDA forecast suggests that rising interest rates will drive interest costs higher by 22.4 percent and that livestock and poultry purchase costs will increase 

13.6 percent. On an inflation-adjusted basis, production expenses are projected to increase $5.7 billion (1.3 percent) in 2023, following an 11 percent increase in 

2022. 

31 The land value summary is an annual report with the next release scheduled for August 2023.

Lower prices and higher input costs will likely tighten 

crop producer profit margins in 2023, particularly for 

those producers who rent a significant share of their 

farmland. Cattle ranchers, on the other hand, are 

likely to see margins expand because of price strength 

on the heels of 2022 herd liquidation combined 

with lower feed costs. Improved drought conditions 

throughout much of the United States during the first 

half of 2023 should also benefit the cattle sector.

Strong net farm income bolstered farm real estate 

(farmland) values in 2022 for a second consecutive 

year last year. Average U.S. farmland values increased 

an estimated 12.4 percent on an annual basis in 

2022, the largest year-over-year increase since 2006, 

according to the August 2022 USDA Land Values 

Summary report.31 Three midwestern states—Iowa, 

Kansas, and Nebraska—reported farmland value 

increases of more than 20 percent. Cropland values 

rose 14.3 percent, while pastureland values increased 

11.5 percent. First quarter agricultural condition 

surveys from various Federal Reserve Banks indicated 

farmland values continued to increase but at a much 

slower pace than in 2022.
2023 Risk Review | 25

$ Billions

Source: U.S. Department of Agriculture.

Note: Nominal dollars. Bars show category contribution to net farm income change, with horizontal stripe bars adding to income and vertical 

stripe bars subtracting from income. Receipt values include home consumption and inventory adjustments. 

CHART 13

Net Farm Income Increased in 2022 as Higher Revenues More Than Oset 

Higher Expenses

0

50

100

150

200

250

2021 Net

Farm Income

Crop

Receipts

Livestock

Receipts

Production

Expenses

Government

Payments

All Other

Factors

2022 Net

Farm Income

141

+28

+61 -53

-12

-2 163

Percent

Source: National Drought Mitigation Center (University of Nebraska Lincoln).

Note: Weekly data from January 4, 2000, to December 27, 2022. 

CHART 14

U.S. Drought Conditions Were Widespread in 2022, Nearing Conditions Recorded 

During the Historically Severe Drought of 2012 

0

10

20

30

40

50

60

70

80

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Share of U.S. in Moderate or Worse Drought
26 | 2023 Risk Review

The steep rise in farmland values during 2022 

outpaced the increase in rents charged to use 

farmland, causing the ratio of farmland value to rents 

to reach their highest levels for both cropland and 

pasture land since data collection began in 1998 (Chart 

15). These record ratios suggest that farmland rents 

may need to increase, thereby pressuring producer 

margins, in order to return the ratio closer to the 

historical level. Alternatively, farmland values may 

decline, weakening the collateral position of farm real 

estate loans.32

Loan growth and higher loan yields boosted farm 

bank earnings in first quarter 2023 following a 

down year in 2022. The median year-over-year total 

loan growth for farm banks increased to 8.6 percent 

in fourth quarter 2022 and 9.3 percent in first quarter 

2023. More specifically, agricultural loan growth at 

farm banks increased to 6.1 percent in first quarter 

2023 from 5.4 percent in fourth quarter 2022, with 

both agricultural production and farm real estate 

loans increasing (Chart 16). This marked the second 

consecutive quarter of annual growth in agricultural 

production loans following a decline in eight of the 

previous ten quarters. The growth in loans likely 

reflects increased financing for higher agricultural 

input costs and a decline in government support 

payments. Growth in farm loans contributed to an 

increase in the median agricultural loan to capital 

concentration ratio, which rose to 209 percent in first 

quarter 2023, up from 205 percent a year earlier but 

below the recent first quarter previous peak of 234 

percent in 2019. 

The median pretax return on assets (ROA) for farm 

banks for full-year 2022 declined 13 basis points from 

one year earlier to 1.17 percent on lower net interest 

margins (NIMs) and a decline in noninterest income. 

The median farm bank ROA for first quarter 2023 

improved to 1.29 percent, up 32 basis points from first 

quarter 2022. Improved NIM from the combination of 

loan growth and higher asset yields contributed to the 

rise in ROA.

32 For example, the ratio of cropland land values to cash rents was last near its current level in 2008; the following year, cash rent increased 15.8 percent, while 

values fell 4.3 percent.

33 Federal Reserve District Agricultural Credit Surveys for Chicago, Dallas, Kansas City, and Minneapolis Districts, as of first quarter 2023.

Despite recent declines, liquidity ratios at farm 

banks remained above the long-term average, 

even though farm banks reported deposit outflows 

in first quarter 2023. Loan growth contributed to 

lower on-balance sheet liquidity ratios at farm banks. 

Consistent with overall bank industry trends, deposits 

reported by farm banks expanded 3.3 percent in 2022 

before contracting nearly 1 percent from a year earlier 

in first quarter 2023. The combination of increased 

loan growth and declining deposits led the median 

on-balance sheet liquidity ratio to decline to 26.6 

percent, down from 33.6 percent a year ago. Despite 

the decline, liquidity ratios reported by farm banks 

remained above the long-term average of 25.5 percent 

as of first quarter 2023. 

Strong farm income helped improve farm balance 

sheets and asset quality, but higher interest rates 

may challenge the farm sector. The record incomes 

during 2022 allowed producers to replenish working 

capital and contributed to favorable agricultural 

asset quality at farm banks. According to surveys 

of agricultural credit conditions by several Federal 

Reserve banks, loan repayment rates on agricultural 

loans increased in 2022 compared to one year earlier.33

Consistent with these surveys, nearly half (45.3 

percent) of farm banks reported having no past-due 

agricultural loans, a slight improvement from 2021. 

Further, only 10 percent of farm banks reported 

agricultural loan net charge-offs in 2022, and the 

charge-off rate among these banks remained low. 

This favorable asset quality trend continued in first 

quarter 2023. Total agricultural loan past-due and 

net charge-off ratios remained low, with similar 

improvements in past-due ratios compared to a year 

earlier. Among farm banks that report agricultural 

loans that were past-due or in nonaccrual, the 

median agricultural loan past-due ratio declined 29 

basis points in first quarter 2023 compared to one 

year earlier and was historically low at 0.72 percent. 

However, interest rates on operating and real estate 

loans rose during 2022 and first quarter 2023, which 

may tighten producer profit margins and adversely 

affect asset quality of some farm banks this year. 
2023 Risk Review | 27

CHART 15

Land Value to Cash Rent Ratios Have Surpassed Their Prior Peaks

Source: U.S. Department of Agriculture.

Note: Data are annual through 2022.

Ratio Ratio

33

34

108

118

0

20

40

60

80

100

120

0

5

10

15

20

25

30

35

40

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Cropland Value to Cash Rent Ratio (Le Axis)

Pasture Value to Cash Rent Ratio (Right Axis)

CHART 16

Agricultural Loan Growth Rebounded in 2022 and Early 2023

Source: FDIC.

Note: Data are quarterly figures among farm banks through March 31, 2023.

Year-Over-Year Growth

Percent

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

Mar-19 Mar-20 Mar-21 Mar-22 Mar-23

Agricultural Production Loans

Farm Real Estate Loans

Total Agricultural Loans
28 | 2023 Risk Review

Commercial Real Estate

• Most commercial real estate (CRE) property types performed well in 2022, but some challenges continued 

into 2023, particularly for office properties.  

• Bank CRE lending grew and community bank lending remained important to the CRE industry. 

• Aggregate CRE asset quality metrics remained favorable, but higher interest rates and economic 

uncertainty pose risks to CRE loan portfolios.

34 Unless otherwise noted, CRE data are from CoStar as of first quarter 2023.

Four of the five major CRE property types ended 

2022 with sound fundamentals, while the office 

market faced increasing risks through first quarter 

2023. Industrial properties continued to benefit from 

strong demand for warehousing and distribution. Of 

the major property types, industrial had the highest 

rent and price growth, while the vacancy rate for 

industrial properties remained near an all-time low 

at the end of 2022.34 Conditions in the industrial 

market remained strong into 2023. But as economic 

conditions weakened and the pace of construction 

remained high, some industrial markets became 

saturated, with supply consistently exceeding demand. 

Demand for multifamily properties continued to 

benefit from the tight single-family housing market. 

Relatively low single-family home affordability kept 

many would-be first-time homebuyers in the rental 

pool. Still, elevated rent levels discouraged some 

potential renters, and rent growth slowed in late 2022 

and into first quarter 2023. Multifamily property price 

growth also continued to slow. 

Retail properties continued to perform well into 2023, 

supported by sustained consumer spending. Net 

absorption, the share of space leased net of space 

vacated, has remained positive for more than two 

Bank-held CRE loans reached more than $3.0 trillion by the end of first quarter 2023. 

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.

Regional Exposure to CRE Lending

Dots on map represent the 1,402 banks (30 percent of all banks) with a concentration of CRE loans, as defined above.

• Community banks hold 28 percent ($865 billion) of the CRE loans on bank balance sheets, a share that remains 

outsized compared to their holdings of 15 percent of total loans.

• Elevated concentrations in CRE lending persist; 30 percent of banks (1,402 banks) have an elevated 

concentration of CRE loans defined as exceeding 300 percent of capital (tier 1 capital and credit loss 

reserves for loans and leases) or construction and development (C&D) loans exceeding 100 percent of capital.

• All FDIC Regions saw a rise in the median CRE loan concentration level compared to a year earlier; exposure 

remained the heaviest in banks headquartered in the West and the Northeast.
2023 Risk Review | 29

years. The national vacancy rate on retail properties 

reached a 15-year low, and retailers opened more 

stores than they closed. Very little new space was 

added between 2018 and 2022, keeping the market 

relatively tight.

Consumers also contributed to recovery in the 

lodging sector. Unleashing pent-up demand for travel, 

consumers accepted rising hotel room rates. In March 

2023, average daily room rates were higher than 

the March 2019 level in 98 percent of U.S. markets. 

Similarly, revenue per available room exceeded the 

2019 level in 87 percent of markets.35

Unlike other major property types, office fundamentals 

weakened as the shift to remote work adversely 

affected office demand, particularly in some larger 

urban markets. Nationally, office rents remained near 

pre-pandemic levels in first quarter 2023 in contrast 

to higher rental rates for the other major property 

types (Chart 17). While the overall office rental rate 

35 CoStar, monthly data as of March 2023.

has been relatively stable through first quarter 2023, 

anecdotal evidence suggests that office property 

owners have decreased effective rents by increasing 

rent concessions, such as free rent and allowances 

for tenant improvements. The increased amount of 

subleased office space, space that is currently leased 

but offered by the original tenant for sublet, also has 

pressured office rents. The amount of office space 

offered for sublease rose as some companies reduced 

their office footprint before the expiration date of 

their existing lease agreement. Office space available 

for sublease, which is leased at rents discounted 

from the underlying lease agreement, has increased 

considerably in the nation’s largest office markets 

and exceeded levels during the Great Recession. San 

Francisco, with its concentration of tech firms, had the 

highest rate of sublease availability at 6.3 percent at 

the end of first quarter 2023, followed by Seattle at 

3.2 percent. 

CHART 17

Rents for Most Property Types Grew in 2022

Source: CoStar.

Note: Quarterly data through first quarter 2023. Hotel "rent" data are three-month moving averages of the Average Daily Rate, 

which is reported monthly.

Rent Index (4Q19=100)

60

70

80

90

100

110

120

130

140

2019 2020 2021 2022

Multifamily

Oice

Retail

Industrial

Hotel
30 | 2023 Risk Review

Office conditions also have been pressured by 

weakening net absorption of office space since the 

start of the pandemic. Net absorption has been mostly 

negative the past three years, which means that 

more office space has been vacated than has been 

newly leased from the start of the pandemic through 

March 2023. Negative net absorption contributed to 

an increase in the national office vacancy rate from 

9.6 percent in first quarter 2020 to 12.8 percent in 

first quarter 2023. Industry forecasts project further 

increases in the national office vacancy rate through 

2023. Low office attendance by workers suggests 

weakness in office properties. Access card swipes at 

a sample of U.S. office buildings indicates attendance 

was only one-half the pre-pandemic level in early 2023.36

Factors such as reduced occupancy and softening 

rents has weighed on office property values. Reports 

suggest that the value of some office properties 

declined considerably from the beginning of the 

pandemic through late 2022.37

Banks reported CRE loan growth, contributing to 

a rise in median CRE loan concentration levels. At 

first quarter 2023, 98 percent of banks held CRE loans 

and CRE was the largest loan category for almost half 

of all banks. CRE loans held by the banking industry 

have increased every quarter since first quarter 2013. 

CRE loans comprised a quarter of total loans held by 

the banking industry, similar to the last cycle peak 

in 2009. However, CRE loans were about 13 percent 

of total banking assets at year-end 2022 and through 

first quarter 2023; this is lower than the 14 percent 

reported in first quarter 2009. 

Growth occurred across all CRE loan types, as well 

as in unfunded CRE loan commitments, in the fourquarter period ending first quarter 2023. Loans for 

existing nonfarm nonresidential real estate properties 

made up the largest portion of the CRE loan portfolio 

at 58 percent.38 Multifamily loans remained the 

second-largest CRE loan category, despite a slight 

decline in first quarter 2023 after increasing in 2022. 

About 16 percent of the CRE loan portfolio consists 

of C&D loans, historically the highest risk CRE loan 

type. Unfunded CRE loan commitments decreased 

36 Kastle, “Back to Work Barometer,” as of May 22, 2023. 

37 Peter Grant, “Shrinking Office Building Values Are Becoming a Dilemma for City Budgets,” Wall Street Journal, December 13, 2022.

38 Nonfarm nonresidential real properties include business and industrial properties, offices, hotels, churches, and other similar properties.

39 CMBS data from Trepp as of May 2023. 

to $653 billion at first quarter 2023, after reaching a 

record high of nearly $675 billion at year-end 2022, 

but remain above the last cycle peak in 2007. The 

unfunded commitments are mostly made up of C&D.

Since first quarter 2022, the industry’s median ratio 

of CRE loans to capital grew from 185 percent to 194 

percent, with median concentrations rising across all 

FDIC Regions. Banks headquartered in the West had 

the highest median level of CRE loans to capital at 281 

percent, followed by banks in the Northeast at 241 

percent. 

Community bank lending continued to be 

important to the CRE industry. Community bank 

CRE loans rose 8 percent from first quarter 2022. 

Community banks held an outsized proportion of 

CRE loans: 28 percent of the banking industry’s 

CRE loans compared with only 15 percent of the 

banking industry’s total loans. Community banks 

headquartered in rural or smaller metropolitan areas 

held 64 percent of the CRE loan volume reported 

by banks headquartered in those areas, outpacing 

community banks in larger metropolitan areas, which 

held 24 percent of CRE loans reported by banks 

headquartered in those areas. More than 29 percent of 

community banks held an elevated concentration of 

CRE loans to capital, the highest share in more than 

12 years.

CRE asset quality metrics remained favorable as 

past-due CRE loans were generally low, but the 

outlook remains uncertain. In first quarter 2023, 

the median CRE past-due loan rate among banks was 

0.15 percent and was low across all FDIC Regions. The 

median past-due rate of 0.19 percent for the subset of 

1,402 banks with an elevated CRE concentration level 

also was historically low compared to previous years. 

Aggregate CRE loan charge-offs were within historic 

norms in 2022 and through first quarter 2023. 

A modest rise in delinquency rates of commercial 

mortgage-backed securities (CMBS) may signal 

a shift in CRE market performance.39 CMBS data 

provide insight into asset quality by property type 

that is not available from Call Report data. CMBS 
2023 Risk Review | 31

delinquency rates steadily improved well into 2022 

as retail and hotel loan performance stabilized and 

other property types showed little change. However, 

CMBS delinquency rates on office properties began 

to rise in 2023 (Chart 18). In addition, the share of 

CMBS loans that are not past due but are in special 

servicing, meaning loans that are not delinquent but 

exhibit other potential performance issues, increased 

particularly among office properties. The increase in 

CMBS delinquency rates, though small, and the rise in 

specially serviced CMBS could indicate an inflection 

point for overall CRE asset quality. Monitoring CMBS 

delinquency trends also is important as more than 

40 percent of banks hold CMBS securities, and CMBS 

holdings represent at least one-quarter of capital at 

more than 10 percent of banks.40

40 Defined as CMBS securities held by banks as a share of tier 1 capital plus credit loss reserves for loans and leases.

41 Board of Governors of the Federal Reserve System, Senior Loan Officer Opinion Survey on Bank Lending Practices, April 2023.

Higher interest rates and the prospect for weaker 

economic conditions may stress bank CRE 

portfolios and constrain loan growth. The high level 

of unfunded CRE loan commitments may suggest that 

CRE loans are poised to grow. However, according to 

an April 2023 survey by the Federal Reserve, bankers 

reported tighter lending policies and weaker demand 

for all types of CRE loans over the past year.41 They also 

expect to tighten lending standards in 2023 across all 

loan categories, including CRE. 

The office sector is particularly vulnerable to 

deterioration. With a structural decline in office 

demand and weak rent growth, some borrowers may 

have difficulty refinancing. Longer-term leases, which 

are prevalent in the office sector, helped to insulate 

CHART 18

Delinquency Rates Among CMBS Oice Loans Are Trending Upward

Source:Trepp.

Note: Data are monthly figures through May 2023, compiled from Trepp Loan Compendium Deal List.

Percent

0

5

10

15

20

25

30

Total

Multifamily

Oice

Retail

Industrial

Hotel
32 | 2023 Risk Review

office property owners from reduced occupancy as 

tenants continued to pay during 2022. However, the 

inability to renew expiring leases at viable rental 

rates, office value erosion, and higher loan-to-value 

ratios could make refinancing more difficult for some 

property owners without raising additional capital. 

A sample of leases in some of the nation’s largest 

markets shows a preponderance of expirations in 

the next few years (Chart 19). Even absent further 

economic slowdown, some borrowers may face 

potentially higher interest rates and debt servicing 

costs or encounter other challenges refinancing. 

Amid these evolving challenges for banks and their 

borrowers, strong risk-management practices are 

essential for operating sound CRE lending programs. 

Share of the Volume of Oice Loans/Leases Maturing in 2023–2025

Percent

Sources: Trepp (CMBS Loan Maturity) and CoStar (Lease Maturity and Availability Rate).

Note: Loan maturity data as of February 15, 2023, shown as a share of total maturities through 2033 for each MSA. Lease maturity data and 

availability rate as of first quarter 2023. Lease maturity data not available at the U.S. level. 

CHART 19

Several U.S. Markets With Substantial Available Space Have a High Share of Loans 

and Leases Maturing in the Next Few Years 

0

5

10

15

20

25

0

10

20

30

40

50

60

Chi SF Hou Atl LA Dal DC Bos NYC Sea U.S.

CMBS Loan Maturity (Le Axis)

Lease Maturity (Le Axis)

Availability Rate (Right Axis)
2023 Risk Review | 33

Consumer Lending

• Strong labor markets continued to support consumers, but a combination of factors including high 

inflation, rising interest rates, increased consumer debt, and stock market declines strained consumer 

balance sheets in 2022 and first quarter 2023. 

• Credit card loans led consumer loan growth at banks, while auto loan growth slowed.

• Asset quality measures for most consumer loan types were better than pre-pandemic levels through first 

quarter 2023 but showed early signs of weakening. Auto loan asset quality worsened, though net chargeoffs remained low.

Strong labor markets supported consumers, but high 

inflation and rising interest rates strained household 

budgets. As the unemployment rate hovered near 

historically low levels, strong labor markets helped 

support nominal income. The tight labor market 

contributed to stronger nominal wage growth, but 

wage gains did not keep up with inflation in 2022, 

causing real disposable personal income (DPI) to fall 

from a year earlier (Chart 20). The decline also reflected 

the end of government support programs, which had 

contributed to strong income growth in 2020 through 

first quarter 2021. Real DPI grew quarter over quarter 

in the second half of 2022 and first quarter 2023 as 

inflation moderated, and real DPI rose above the yearearlier level in the first quarter. Real consumer spending 

continued to grow in 2022 and first quarter 2023.

Higher inflation contributed to the decline in the 

household savings rate from the highs in 2020 and first 

quarter 2021 to near historic lows by the end of third 

quarter 2022 (Chart 21). In fourth quarter 2022 and 

first quarter 2023, the savings rate rose but remained 

below its 2019 pre-pandemic level. Higher inflation 

may have also contributed to increased consumer 

debt levels and a rise in the household debt-to-income 

ratio. In 2022, consumers were paying more for their 

Consumer loans held by FDIC-insured institutions totaled $2.0 trillion as of first quarter 2023. 

Source: FDIC.

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

loans are not shown.

Regional Exposure to Consumer Lending

Dots on the map represent the 221 banks (4.7 percent of all banks) with total consumer loans above 100 percent of capital.

• Community banks hold 4.1 percent ($84 billion) of total banking industry consumer loans.

• Concentration in the industry remains low. Only 4.7 percent of all banks (221 banks) hold a concentration

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

including several credit card banks with concentrations above 300 percent.

• Sixty-seven percent of banks (148 banks) with a concentration of consumer loans are community banks.
34 | 2023 Risk Review

purchases even as they may have cut back on other 

spending. Mortgage debt also increased last year. 

Together, these factors contributed to an increase 

in the total household debt-to-income ratio. After 

declining during the pandemic, the ratio of household 

debt to income normalized in 2022, rising to prepandemic levels.

Stock market declines also stressed household 

balance sheets. The S&P 500 fell about 18 percent 

in 2022 and ended first quarter 2023 up 7.5 percent 

from the start of the year. Lower stock market value 

since 2021 contributed to a year-over-year decline in 

aggregate household assets in the second half of 2022 

and first quarter 2023. Higher debt and lower asset 

values caused household net worth to decline from a 

year earlier in the second half of 2022 and first quarter 

2023. 

42 Credit card loan balances are highly seasonal and rise from first quarter to fourth quarter, so we compare first quarter 2019 to first quarter 2023. 

43 Community banks hold a relatively small share, 6 percent, of total auto loan balances held by the banking industry.

Consumer loan balances at banks grew from a 

year earlier in 2022 and in first quarter 2023 led by 

strong credit card loan growth. Credit card loans 

are about half of all consumer loans held by banks; 

auto loans and other consumer loans make up the 

other half. Credit card loans rebounded strongly in 

2022 and first quarter 2023 after falling from second 

quarter 2020 through second quarter 2021 (Chart 22). 

Credit card loans surpassed their pre-pandemic level 

in second quarter 2022 and by first quarter 2023 were 

about 14 percent higher than in first quarter 2019.42

Growth of auto loan balances slowed for the banking 

industry overall in 2022 and first quarter 2023 but 

accelerated at community banks.43

CHART 20

Real Income Declined in 2022 Aer Growing Strongly in 2020 and 2021

Source: Bureau of Economic Analysis (Haver Analytics).

Note: Income and spending are seasonally adjusted at an annual rate. Quarterly data through first quarter 2023.

Real Income and Spending

$ Billions

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

18,000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Real Disposable Personal Income

Real Personal Consumption Expenditures
2023 Risk Review | 35

Personal Savings as a Share of Disposable Income

Percent

Source: Bureau of Economic Analysis (Haver Analytics).

Note: Monthly data through March 2023. 

CHART 21

The Savings Rate Fell Close to Historical Lows in 2022 Aer Spiking

During the Pandemic 

0

5

10

15

20

25

30

35

2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

CHART 22

Credit Card Loans Led Loan Growth at Banks in 2022

Source: FDIC.

Note: Quarterly data through first quarter 2023.

Year-Over-Year Growth

Percent

-15

-10

-5

0

5

10

15

20

Mar-2019 Mar-2020 Mar-2021 Mar-2022 Mar-2023

Consumer Loans Credit Card Loans

Auto Loans Other Consumer Loans
36 | 2023 Risk Review

CHART 23

Early-Stage Past-Due Rates Are Rising, Especially for Auto Loans

Source: FDIC.

Note: Quarterly data through first quarter 2023.

Early-Stage Past-Due Rate

Percent

Consumer Loans Credit Card Loans

Auto Loans Other Consumer Loans

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2017 2018 2019 2020 2021 2022 2023

Early signs of consumer loan performance problems 

emerged at banks, primarily among auto loans, but 

consumer loan asset quality measures generally 

remained favorable. Early-stage past-due rates—the 

share of loan balances 30 to 89 days delinquent—for 

auto and credit card loans rose throughout 2022 and 

fell in first quarter 2023 following seasonal trends 

(Chart 23). The early-stage past-due rate for credit 

cards in first quarter was about the same as the rate 

in first quarter 2019, while the rate for auto loans was 

above its first quarter 2019 level. In first quarter 2023, 

total consumer loans also exhibited similar trends for 

noncurrent rates—the share of loans more than 90 

days past due or in nonaccrual status.

While overall asset quality measures for total 

consumer loans remained favorable in 2022, auto loan 

delinquencies worsened. Both the early-stage pastdue rate and noncurrent rate for auto loans rose in first 

quarter 2023 to above their pre-pandemic levels. Net 

charge-offs for auto loans rose to their pre-pandemic 

level, even as high vehicle prices may have lessened 

losses from charged-off loans.

The trends in consumer loan performance could 

deteriorate in 2023 if the labor market or economic 

conditions soften. The concerning asset quality trends 

in auto loans may worsen if auto prices normalize. 
2023 Risk Review | 37

Energy

• Energy prices softened during second half 2022 as oil prices receded from earlier highs and were more 

stable through early 2023. 

• Despite the decline in prices, the energy industry remained profitable, supporting employment in energyconcentrated states.44

• Bank loan exposure to oil and gas firms continued to decline in 2022 from 2021 levels.  

• Community bank asset quality in energy-concentrated states continued to improve through first quarter 

2023. 

• Despite strength in 2022, the outlook for conditions in the energy sector weakened by year-end and 

remained uncertain in early 2023. 

44 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 66 percent of natural gas in December 2021.

45 Standard deviation was used to calculate oil price volatility, based on author’s calculations using Energy Information Administration/Thompson Reuters oil 

price data.

46 Mining and logging employment numbers for Delaware and Hawaii were omitted from the non-energy total because they were aggregated along with their 

construction employment numbers. Cross-referencing with detailed Quarterly Census of Employment and Wages jobs data from the Bureau of Labor Statistics 

indicates very little energy employment in those two states, however.

Oil markets were volatile in 2022, and oil prices 

rose on average before moderating in the second 

half of the year through early 2023. In 2022, daily 

West Texas Intermediate (WTI) oil prices were at their 

most volatile since 2014.45 The volatility reflected a 

sharp increase in prices early in 2022, followed by a 

sharp correction through the end of the year (Chart 

24). Oil prices averaged almost $95 per barrel in 2022, 

more than 39 percent higher than the year before, but 

averaged around $76 in January through May 2023. An 

observable sharp upward movement in WTI oil prices 

during the first half of 2022 can be attributable to 

disruptions in energy supplies caused by geopolitical 

tensions in Ukraine that began in late February 2022. 

Sanctions imposed by sovereigns on Russia and other 

independent corporate actions taken in response 

to Russia’s invasion of Ukraine also contributed to 

increased supply risks and higher oil prices. However, 

in the second half of the year, oil prices eased. 

According to the Energy Information Administration, 

crude oil prices were generally decreasing due to 

growing concerns around weakening global economic 

conditions. Uncertainties over the duration of China’s 

pandemic-related lockdowns in 2022 added to those 

concerns, and rapid withdrawals from the Strategic 

Petroleum Reserve helped relieve supply challenges 

and contributed to softening oil prices. 

In March and April 2023, Russia and several OPEC+ 

members announced oil production cuts of 1.7 million 

barrels per day (bpd) in addition to the 2 million bpd 

of cuts announced in October 2022. Overall, the cuts 

would take about 3 percent of the world’s petroleum 

production off the market beginning in May through 

the end of 2023. The decision to cut oil production 

could result in significantly higher oil prices. 

Despite the decline in oil prices, the industry 

remained profitable and employment growth 

in energy-concentrated states continued to 

outpace that of non-energy states. Strong demand 

sustained energy prices above breakeven rates for 

most companies. Economic conditions in energyconcentrated states are highly sensitive to changes 

in energy-related jobs. In 2022, energy-concentrated 

states had more than eight times the concentration of 

mining and logging employment than the rest of the 

nation. For the year ending first quarter 2023, nonfarm 

employment in energy states grew a combined 3.7 

percent, a full percentage point faster than the 2.7 

percent increase in employment growth for nonenergy states. Better performance for energy states 

during this period was due in part to job growth in 

the mining and logging sector. Aggregate mining and 

logging employment in energy states grew more than 

twice as fast (9.8 percent) as that of non-energy states 

(4.2 percent).46 Energy states continued to receive a 

boost from higher energy prices, which stimulate 
38 | 2023 Risk Review

West Texas Intermediate Oil Price

$ per barrel

Source: Energy Information Administration. Note: Data are daily for the year 2022 through May 22, 2023.

CHART 24

Geopolitical Concerns Caused Oil Prices to Rise Sharply in the First Half of 2022

Before Falling in the Second Half Due to Recession Fears 

Jan 3, 2022,

Mar 08, 2022,

$75.99

$123.64

May 22, 2023,

$71.81

60

70

80

90

100

110

120

130

Jan-22 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23

domestic energy production and demand for energyrelated employment. Energy segments that benefited 

from higher prices were liquefied natural gas, refining, 

and renewable energy.

Bank lending to the oil and gas industry declined 

in 2022, continuing a trend since the start of the 

pandemic; however, current exposure to the 

industry exhibits relatively modest credit risk, given 

strength in the oil and gas industry during the year.

Results of the 2022 Shared National Credit (SNC) 

review indicate that loan commitments to the oil and 

gas sector declined almost 16 percent from year-end 

2019 through 2022, with most of the decline occurring 

in 2021.47 As global demand for oil plummeted in 2020, 

the share of oil and gas loans in the SNC program that 

were rated special mention or adversely classified 

reached 23.3 percent.48 Banks responded to weaker 

conditions in the energy industry by reducing credit 

allocations and, in some cases, by exiting entirely 

due to asset quality and environmental, social, and 

governance-related concerns. 

47 Oil and gas sector lending is not available at the bank level in Call Report data. However, the Shared National Credit (SNC) Program, which reviews large, 

syndicated loans by industry sectors that are held by banks, may serve as a proxy for bank loan exposure to the oil and gas industry. The SNC Program assesses 

risk in complex credit loan commitments to borrowers in excess of $100 million that are shared by multiple regulated financial institutions. SNC reports can be 

found at https://www.occ.treas.gov/publications-and-resources/publications/shared-national-credit-report/index-shared-national-credit-report.html.

48 According to the Energy Information Administration, global oil consumption declined 9.3 percent in 2020, far more than any period on record since 1974.

After the decline in 2020, oil demand began to 

strengthen in 2021 and 2022 as industry profits jumped 

and oil and gas firms reduced debt. Among 11 industry 

sectors represented in the S&P 500, the S&P Energy 

Index’s performance ranked first in 2021 and 2022. 

In 2022, losses exceeded 18 percent across the S&P 

500, but the Energy Index gained almost 66 percent. 

Other than a small gain in the utility sector, energy 

was the only sector to record a gain over the year. The 

sector’s strong equity performance was the result 

of higher prices combined with a collective focus on 

selectively funding new projects and returning excess 

cash flow to shareholders. Consistent with improved 

industry conditions, the share of oil and gas loans in 

the SNC program that received special mention and 

adverse classifications declined sharply to 3.9 percent. 

A continuing trend of declining oil prices during the 

first five months of 2023 compressedthe favorable gap 

between oil prices and breakeven rates, which could 

moderate the strength in the oil and gas industry in 

early 2023.
2023 Risk Review | 39

Asset quality of community banks in energyconcentrated states continued to improve, 

reflecting stronger conditions in the sector. While 

community banks generally do not lend directly 

to the energy sector, these banks are often active 

lenders and providers of banking services in energyconcentrated areas. Asset quality improvement in 

community banks in energy-concentrated states was 

similar to that of community banks in other states. 

The total past-due loan rate for community banks 

headquartered in energy-concentrated states was 0.70 

percent in first quarter 2023, excluding governmentguaranteed Paycheck Protection Program loans, down 

from 0.84 percent one year earlier and only slightly 

higher than the 0.63 percent for community banks 

not headquartered in energy-concentrated states 

(Chart 25). The total past-due rate for commercial 

and industrial loans for community banks in energyconcentrated states improved modestly in first quarter 

2023 from a year earlier and was near its historical low 

since data collection began in 1984. Still, the past-due 

rate remained more than double the near-historic low 

rate of community banks in other states.

49 Short Term Energy Outlook, U.S. Energy Information Administration, June 2023, p 29. 

50 OPEC, “33rd OPEC and Non-OPEC Ministerial Meeting,” press release, October 5, 2022. 

Despite strength in 2022, the outlook for the energy 

industry weakened through early 2023. Softening 

macroeconomic conditions, geopolitical events, and 

the potential for future supply disruptions will make it 

challenging to sustain the 2022 favorable trends in the 

energy sector. Several elements of uncertainty suggest 

oil market volatility could continue in 2023, including 

weak or recessionary prospects for the domestic 

and global economy, potential changes in Russian 

oil production, and the redistribution effects of oil 

and gas supply lines amid sanctions and oil import 

bans. According to the June 2023 Energy Information 

Administration Short-Term Energy Outlook, prices 

are forecast to soften further but are expected to 

remain above $70 per barrel by fourth quarter 2023.49

Additional pressure on supply side fundamentals 

is also evident with the moves by OPEC+ to reduce 

production to stabilize global markets.50 These factors 

should help support economic and banking conditions 

in states reliant upon employment in the energy sector. 

Past-Due Loans

Median, percent

Source: FDIC.

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. Data are quarterly through March 31, 2023.

CHART 25

Despite Extreme Oil Price Volatility, Community Bank Past-Due Loans Have 

Remained Low and Stable in Energy-Concentrated States 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2023

Energy-Concentrated States Other States
40 | 2023 Risk Review

Housing

• The housing market continued to slow from pandemic highs as mortgage rates rose sharply from 2022 lows 

and remained elevated through first quarter 2023.

• With higher mortgage rates and uncertain economic conditions, the pace of home price appreciation 

slowed considerably from mid-2022 peaks through first quarter 2023. Home prices remain high, supported 

by a historically low supply of homes for sale.

• Mortgage originations fell as the housing market weakened, but banks reported higher residential loan 

balances early in 2023 and increased residential construction and development (C&D) lending.

• While residential mortgage loan asset quality and underwriting remained favorable through first quarter 

2023, early signs of potential credit deterioration emerged. 

51 Mortgage Bankers Association. 

52 Census Bureau and Bureau of Economic Analysis, annual permits and real private residential fixed investments data through 2022. 

Sharply higher mortgage rates in 2022 contributed 

to a slowdown in the housing market later in the 

year that continued into first quarter 2023. After 

declining to historically low levels, the average rate 

on a 30-year fixed-rate mortgage rose sharply in 2022. 

Between January and October 2022, the weekly rate 

increased from 3.52 percent to 7.16 percent, the 

largest increase in one year since 1994. By March 2023, 

the 30-year fixed-rate mortgage had eased to 6.40 

percent but remained relatively high.51

As mortgage rates rose sharply in 2022, residential 

construction declined as home sales weakened and 

home price gains slowed nationwide. Real private 

residential fixed investment fell 10.6 percent in 2022, 

the largest annual decline since 2009.52 Residential 

Residential loans held by banks totaled $2.78 trillion as of first quarter 2023. 

Source: FDIC.

Regional Exposure to Residential Lending

Dots on the map represent the 604 banks (12.9 percent of all banks) with total 1–4 residential loans above 300 percent of capital.

• Of the $2.78 trillion in residential loans, community banks hold 17 percent ($474.6 billion).

• Almost 13 percent of all banks (604) hold a concentration of residential loans above 300 percent of capital 

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

• Slightly more than 40 percent of community banks (1,777) report that residential mortgage loans are 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.
2023 Risk Review | 41

construction continued to decline in first quarter 2023. 

Sales of new and existing homes also began to decline 

in 2022, but new home sales listings edged up in first 

quarter 2023 as builders offered incentives, such as 

rate buy-downs, to attract potential buyers. Existing 

home sales continued to decline in first quarter 2023. 

With higher mortgage rates and uncertain economic 

conditions, the pace of home price appreciation 

slowed considerably from mid-2022 through first 

quarter 2023. After increasing at double-digit rates 

from first quarter 2021 to fourth quarter 2022, home 

price growth slowed nationally to single-digits during 

first quarter 2023 (Chart 26).53 During the pandemic 

when home prices increased rapidly across the 

country, metro areas including Boise and Phoenix 

experienced peak home price appreciation of more 

than 30 percent.54 Appreciation rates have since 

slowed from recent highs, but prices remained well 

above pre-pandemic levels as of first quarter 2023. 

As of March 2023, home price growth had slowed the 

53 Federal Housing Finance Agency, quarterly home price data through first quarter 2023.

54 S&P CoreLogic Case-Shiller, quarterly home price data through March 2023.

55 S&P CoreLogic Case-Shiller, monthly home price data through March 2023.

56 Ibid.

57 An affordability index above 100 signifies more than enough income to qualify for a mortgage loan on a median priced home with a down payment of 20 

percent. An index above 100 is deemed to be affordable, while an index below 100 is deemed to be unaffordable. 

most among more expensive markets in the West, 

such as Seattle and San Francisco, where remote work 

options led to out-migration, which pushed home 

prices noticeably below their peak. Since reaching 

peak levels, home prices have fallen faster than the 

nation in nine of the nation’s 20 largest markets, 

according to S&P CoreLogic Case-Shiller.55 In contrast, 

Tampa and Miami led the nation in home price gains 

from pre-pandemic levels through first quarter 2023 

as in-migration into the Southeast supported home 

price appreciation in these markets where home prices 

remain near their recent highs.56

Despite easing home price appreciation in the second 

half of 2022 through first quarter 2023, housing 

affordability remained well below pre-pandemic levels 

for the nation. The National Association of Realtor’s 

Housing Affordability Index was 108.1 in first quarter 

2023, much lower than its pre-pandemic level of 178.4 

and below the historical average of 143.3.57

Home Price Index (HPI)

Year-over-year percent change

Sources: S&P DowJones Indices, Federal Housing Finance Agency, and National Bureau of Economic Research (Haver Analytics).

Note: Data are quarterly seasonally adjusted figures through first quarter 2023.

CHART 26

U.S. Home Price Growth Slowed in Mid-2022 and Trended Lower Through 

First Quarter 2023 

-25

-20

-15

-10

-5

0

5

10

15

20

25

2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

Recession

FHFA HPI

S&P/Case-Shiller HPI
42 | 2023 Risk Review

Total Mortgage Origination Volumes 

$ Billions

Source: Mortgage Bankers Association (Haver Analytics).

Note: Data are annual through 2022 for 1-4 unit family loans expressed in billions.

CHART 27

Mortgage Origination Volumes Dropped Sharply in 2022 Following Elevated 

Levels the Prior Two Years 

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Refinances Purchases

Housing prices remained high supported in part by 

a limited supply of homes for sale. Housing supply, 

which includes existing homes and new homes for 

sale, has been relatively tight following the decline 

in the construction of single-family homes after the 

large excess supply of new home construction during 

the housing cycle in the late-2000s.58 Housing supply 

edged up in 2022 but remained lower than the prepandemic level through May 2023.59 Existing homes 

for sale represent the largest share of single-family 

housing supply; however, the sharp rise in mortgage 

rates has hindered the inventory of existing homes. 

Anecdotal evidence suggests homeowners with low 

fixed-rate mortgages, which make up a large share 

of homeowners, have been reluctant to list their 

homes for sale.60 The share of new homes for sale also 

declined since late 2021 through early 2023 after rising 

early in the pandemic. 

58 Existing homes represent nearly 90 percent of homes for sale nationally. Existing homes for sale increased from a record low of 1.6 months in January 2022 to 

2.9 months in December 2022 as demand softened due to higher mortgage rates and increased economic uncertainty.

59 National Association of Realtors. 

60 Lotfi Karoui, Vinay Viswanathan, and Ronnie Walker, “Inventory Is Tipping the Scales,” Goldman Sachs, May 31, 2023.

61 Mortgage origination volume estimates include only single-family (1-4 unit), closed-end, first lien, home purchase or refinanced loans that were originated 

through the retail, consumer direct, broker wholesale, or non-delegated correspondent production channels. The estimates exclude subordinate liens, HELOCs 

and home equity loans, and purchased loans (i.e., loans originated through the delegated correspondent channel to avoid double counting loans). 

Residential mortgage activity slowed in 2022 

following rapid gains the previous two years. For 

the year ending 2022, mortgage origination volume 

across all types of mortgage lenders decreased 49 

percent from a year earlier, according to the Mortgage 

Bankers Association.61 After spiking in 2020 and 2021, 

origination of new mortgages to purchase a home in 

2022 returned closer to levels before the pandemic. 

Mortgages originated for refinancing declined in 2022, 

reaching a record low, as many existing homeowners 

had already locked into historically low fixed-rate 

mortgages (Chart 27). In first quarter 2023, mortgages 

to purchase a home decreased 30 percent year over 

year and approached the first quarter 2020 level, and 

refinancings continued to decline.
2023 Risk Review | 43

Although residential mortgage originations 

declined, the banking industry reported higher 

residential loan balances through first quarter 

2023, including loans for residential C&D.62 Banks 

reported residential loans totaling $2.78 trillion as 

of first quarter 2023, up 9.5 percent from one year 

earlier and the highest amount since 2008. These loans 

were the largest loan segment for nearly half of all 

62 Federal Deposit Insurance Corporation, Call Reports. Total residential loans include real estate loans secured by 1–4 family residential properties (home equity 

lines of credit plus all other 1–4 family residential residential real estate loans).

63 Federal Deposit Insurance Corporation, Call Reports. Call Report data for total residential loans are in dollars.

banks.63 Both community banks and noncommunity 

banks reported an increase in residential loans from 

a year earlier. One-to-four family residential loans, 

which represent 90 percent of total residential 

mortgage loans, drove the increase; home equity loans 

accounted for most of the remainder. Balances of 

home equity lines of credit (HELOCs) increased 3.3 

Adjustable-Rate Mortgages

$ Billions

30-Year Fixed-Rate Mortgage Rate

Percent

Sources: FDIC and Freddie Mac (Haver Analytics).

Note: Data are quarterly through first quarter 2023. Weekly mortgage interest data have been converted by Haver to quarterly data.

CHART A

The Volume of Adjustable Rate Mortages Declined in First Quarter 2023 

as Mortgage Rates Eased 

0

1

2

3

4

5

6

7

8

9

0

200

400

600

800

1,000

1,200 Adjustable-Rate Mortgages (Le Axis)

30-Year Fixed-Rate Mortgage Rate (Right Axis)

Adjustable-Rate Mortgages (ARMs) Rose as Long-Term Mortgage Rates Increased

As fixed mortgage rates rose sharply during 2022, demand for ARMs increased. Aggregate bank 

holdings of ARMs rose from 28 percent of total residential mortgage loans to 33 percent during 2022. 

As long-term mortgage rates eased in early 2023, the ARM share at banks declined slightly in first 

quarter 2023 to 30 percent (Chart A). Banks headquartered in states that experienced the highest home 

price appreciation rates reported a larger share of ARMs to total residential loans during the period. 

For example, ARMs as a share of total residential loans were 58 percent for banks headquartered in 

California and 50 percent for banks headquartered in Florida, traditionally among the highest in the 

nation, and well above the national average. Despite the increase, the share of ARMs remained lower 

than in the early 2000s housing cycle, and industry studies indicate that underwriting is stronger for 

ARMs in this cycle. 
44 | 2023 Risk Review

percent in first quarter 2023 on an annual basis. Both 

noncommunity banks and community banks reported 

an increase in HELOCs. 

Mortgage balances rose as banks may have retained 

them on their balance sheets rather than selling them. 

During first quarter 2023, residential mortgage loans 

sold declined nearly 24 percent from the previous 

quarter and 69 percent from a year earlier. In contrast, 

residential mortgage loans sold rose at a quarterly 

average of 3.1 percent before the pandemic.64 During 

first quarter 2023, bank mortgage portfolios included 

long-term fixed rate mortgages originated when 

mortgages rates were lower, reducing their market 

value as interest rates rose. A greater share of longerterm fixed rate mortgages with lower yields could 

challenge net interest margins (see the Net Interest 

Margins and Interest Rate Risk Section of this report for 

more information).

A higher volume of total residential mortgage loans 

contributed to a rise in the ratio of residential 

mortgage loans to capital to 133 percent as of first 

quarter 2023, up from 122 percent one year earlier 

but below the pre-pandemic median of 138 percent 

in fourth quarter 2019. Nearly 13 percent of all banks 

reported total residential loans to capital above 300 

percent, up moderately from last year but below the 17 

percent peak reached in 2011. 

Although construction of new homes has slowed, 1–4 

family residential C&D loans reached $105.4 billion in 

first quarter 2023, up 14 percent from a year earlier 

and the highest balance since third quarter 2009. 

Both community banks and noncommunity banks 

reported an increase in 1–4 family residential C&D loan 

balances last year. While funded amounts increased, 

the amount of unfunded C&D commitments declined 

by 6 percent to $95 billion in first quarter 2023 but 

remained higher than the pre-pandemic level. Nearly 

97 percent of banks with high C&D concentrations 

are community banks, consistent with the long-term 

trend.65

64 In this reference, the pre-pandemic period refers to first quarter 2015 through fourth quarter 2019.

65 High concentration is defined as banks with 1-4 residential C&D loans greater than 50 percent of capital. 

66 Federal Deposit Insurance Corporation, Call Reports. Noncurrent 1–4 family residential loans are those secured by 1–4 residential properties 90 days or more 

past due and in nonaccrual status. Excluding Government National Mortgage Association (GNMA) noncurrent balances, the noncurrent rate reported by the 

banking industry declined from 1.35 percent to 0.93 percent. Thirty-four percent of the decline in 1–4 residential noncurrent loans was due to lower rebooked 

GNMA noncurrent balances, which fell 21 percent from the year-earlier level.

While residential mortgage loan asset quality 

remained favorable through first quarter 2023, 

early signs of potential credit deterioration 

emerged. After peaking in fourth quarter 2020 

following the onset of the pandemic, asset quality 

measures for residential mortgage loans remained 

favorable in first quarter 2023. The aggregate total 

residential mortgage loan past-due rate declined to 

1.93 percent in first quarter 2023 from 2.40 percent one 

year earlier, and the noncurrent rate declined to 1.35 

percent. These measures remained below the prepandemic levels and well below peak rates following 

the housing downturn a decade ago. However, the 

early-stage past-due rate on residential mortgage 

loans ticked up to 0.58 percent in first quarter 2023, 

slightly higher than a year earlier (Chart 28).66 

The total past-due rate on 1–4 family residential 

C&D loans rose to 0.69 percent in first quarter 2023, 

up from one year earlier and the previous quarter 

but below the pre-pandemic level of 0.97 percent in 

fourth quarter 2019. Similar to trends for residential 

mortgage loans, the early-stage past-due rate on 1–4 

family residential C&D loans rose to 0.50 percent 

in first quarter 2023 from 0.38 percent the previous 

quarter but remained lower than the pre-pandemic 

level. The noncurrent rate on 1–4 family residential 

C&D loans also remained low at well below 1 percent. 

While overall residential mortgage loan asset quality 

measures remained low by historical standards as of 

first quarter 2023, slight increases in past-due rates 

on residential mortgage loans and residential C&D 

loans could indicate potential weakness among some 

mortgage borrowers.
2023 Risk Review | 45

Percent

Source: FDIC.

Note: Data are quarterly through first quarter 2023.

CHART 28

Residential Mortgage Asset Quality Remained Favorable in 2023, but the 

Early-Stage Delinquency Rate Moved Slightly Higher Over the Previous Year

0

2

4

6

8

10

12

Residential 30-89 Days Past-Due Loan Rate

Residential Noncurrent Past-Due Loan Rate

Bank residential mortgage lenders may face 

increased headwinds in 2023 if housing market 

conditions deteriorate further, but low delinquency 

rates and relatively sound underwriting are likely to 

help those lenders. Forecasts for home price trends 

vary; some forecasts indicate that home prices may 

decline in 2023 or continue to appreciate at a slower 

pace than in 2022.67 The housing outlook remains 

challenged by economic uncertainty with a prospect 

of a recession, high inflation and interest rates, supply 

constraints, and sharp changes in net in-migration 

patterns. Even with weaker housing activity, many 

industry forecasts suggest that home prices nationally 

will remain above their pre-pandemic level in the 

absence of a severe recession. 

Despite early signs of deterioration, the total pastdue rate on residential mortgages reported by the 

banking industry remained favorable in first quarter 

67 CoreLogic Case-Shiller, Federal Housing Finance Agency, and S&P Dow Jones (Moody’s Analytics) annual home price forecast data through 2023 ; Goldman 

Sachs, “Why The Global Housing Market Has Further to Slide,” March 22, 2023; CoreLogic, “U.S. Home Price Insights – May 2023,” May 2, 2023; Zillow, “Zillow 

Home Value and Sales Forecast: June 2023,” June 12, 2023.

68 Board of Governors of the Federal Reserve System, Senior Loan Officer Opinion Survey on Bank Lending Practices, April 2023.

69 New York Fed Consumer Credit Panel/Equifax. As of first quarter 2023, 60.7 percent of all mortgages were originated to borrowers with a credit score of 760 or 

higher, compared with 30.7 percent reported in first quarter 2008.

2023, and industry reports suggest that residential 

mortgage underwriting remained relatively sound. 

According to an April 2023 Federal Reserve survey, in 

response to weakening conditions, a growing share of 

bank respondents tightened underwriting standards 

on residential real estate loans in first quarter 2023.68

A larger share of current residential mortgages 

outstanding is to borrowers with high credit scores, 

nearly 61 percent, almost double the share reported 

during the Great Recession.69 However, banks with less 

diversified business models that have relied heavily 

on residential mortgage activity may face increased 

risk should the decline in the housing market and 

mortgage originations that occurred last year become 

more severe.
46 | 2023 Risk Review

Leveraged Lending and Corporate Debt

• Corporate borrowers continue to face challenges of high inflation, rising interest rates, and an economic 

slowdown.

• Corporate bond and leveraged loan markets have experienced stress; prices and issuance declined, while 

spreads have increased through early 2023.

• Defaults and distress ratios rose through early 2023 but remained low relative to past stress periods.

• Banks remained exposed to corporate debt through both direct credit risk exposure and investment 

banking activities, and indirectly through changes in macroeconomic conditions.

70 Bureau of Labor Statistics and the Board of Governors of the Federal Reserve System.

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

72 PitchBook Leveraged Commentary & Data (LCD).

73 Board of Governors of the Federal Reserve System, Senior Loan Officer Opinion Survey on Bank Lending Practices.

74 PitchBook LCD.

75 Ibid.

76 Board of Governors of the Federal Reserve System, Financial Accounts of the United States; Bureau of Economic Analysis.

77 PitchBook LCD.

Corporate borrowing conditions deteriorated 

in 2022 and through first quarter 2023 amid 

rising interest rates, high inflation, and growing 

expectations of a possible recession. U.S. price 

inflation rose to the highest level in decades in late 

2021 and into 2022, prompting the Federal Reserve 

to rapidly increase interest rates, which pushed up 

interest rates for corporate borrowers.70 Spreads on 

corporate debt widened amid concerns about the 

adverse effects of inflation and the outlook for an 

economic recession, further pushing up borrowing 

costs.71 While spreads moved markedly higher from 

2021 levels in 2022 and at the start of 2023, they 

remained well below levels reached during the crisis 

periods of the early months of the pandemic and the 

Great Recession. Leveraged loan distress ratios and 

default rates also rose from the low levels in 2021 but 

likewise remained well below previous crisis periods 

through early 2023 (Chart 29).72 Bank business lending 

conditions tightened beginning in the second half of 

2022 and through first quarter 2023, with net lending 

standards tightening significantly for both commercial 

and industrial (C&I) and commercial real estate (CRE) 

loans.73 Secondary market loan prices declined and 

market price volatility increased in 2022. Price declines 

were more pronounced for lower-rated borrowers. 

Loan prices stabilized in early 2023 but remained 

below 2021 levels.74

Corporate debt issuance slowed sharply, especially 

for lower-rated and more highly leveraged 

borrowers. Corporate bond issuance declined as 

well, with investment grade issuance falling nearly 

15 percent and high-yield issuance falling almost 80 

percent to its lowest level since 2008.75 Despite lower 

debt security issuance, growth in corporate loans was 

robust, leading to an increase in total corporate debt 

in 2022. However, the increase was slower relative to 

growth in GDP and corporate profits through the end 

of 2022, reducing the corporate debt-to-GDP ratio to 

below 2020 and 2021 levels and the corporate debt-toprofits ratio to the lowest point since 2015 (Chart 30).76

Total issuance in the leveraged loan market, a subset 

of the corporate debt market, sharply declined in 2022 

and into first quarter 2023 to pre-pandemic levels, 

normalizing from the record issuance in 2021 (Chart 

31). Leveraged loan issuance fell by nearly half in 2022, 

driven by a sharp decline in institutional leveraged 

loans, which are generally sold to insurers, pension 

funds, collateralized loan obligations (CLOs), and other 

types of investors. Merger and acquisition activity, 

which typically drives growth for leveraged loans, 

peaked in 2021 but was depressed in 2022 and first 

quarter 2023, reducing institutional leveraged loan 

issuance to a 12-year low.77
2023 Risk Review | 47

Leveraged Loan Default Rate

Percent

Leveraged Loan Distress Ratio

Percent

Source: PitchBook Leveraged Commentary & Data.

Note: Default rate is lagging 12-month rates. Distress ratio is the share of loans priced below 80 (par is 100). Monthly data through April 2023.

CHART 29

Leveraged Loan Distress and Default Rates Rose in 2022 and Early

2023 but Remain Below the Levels Reached in Past Stress Periods 

0

10

20

30

40

50

60

70

80

90

0

1

2

3

4

5

6

7

8

9

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

Default Rate (Le Axis)

Distress Ratio (Right Axis)

Nonfinancial Corporate

Debt-to-GDP Ratio

Nonfinancial Corporate

Debt-to-Profit Ratio

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

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

and includes inventory valuation adjustment at a seasonally adjusted annual rate. Quarterly data through fourth quarter 2022.

CHART 30

Corporate Debt Relative to GDP and Corporate Profits Moderated in 2022 

Relative to 2020 and 2021 Levels 

0

4

8

12

16

20

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

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

Nonfinancial Corporate Debt-to-GDP (Le Axis)

Nonfinancial Corporate Debt-to-Profit (Right Axis)
48 | 2023 Risk Review

Issuance

$ Billions

Source: PitchBook Leveraged Commentary & Data.

Note: Annual data from 2012 through 2022. 

CHART 31

High-Yield Corporate Bond Issuance Fell to Decade Low, While Leveraged Loan 

and Investment-Grade Bond Issuance Moderated

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Investment-Grade Bonds High-Yield Bonds Leveraged Loans

Leveraged Loans Maturing

$ Billions

CHART 32

Leveraged Loan Borrowers Extended Maturities Into the Late 2020s, 

Reducing Near-Term Refinancing Risks

0

100

200

300

400

500

600

2023 2024 2025 2026 2027 2028 2029 2030

As of Dec. 31, 2020 As of Dec. 31, 2021 As of May 12, 2023

Source: PitchBook Leveraged Commentary & Data.

Note: Based on yearly data through May 2023.
2023 Risk Review | 49

Banks face direct and indirect exposure to 

corporate debt and leveraged lending markets.

The banking industry has direct exposure to risks in 

corporate debt through holdings of debt securities, 

bilateral loans, participation in syndicated loans, and 

lending to originators of private credit transactions. 

The highest risk segment of corporate debt is typically 

loans to companies with higher debt levels called 

leveraged loans. Leveraged loans are typically floating 

rate, so credit risk is the primary risk to banks from 

direct loan holdings, while holdings of fixed-rate 

corporate bonds expose banks to interest rate risk and 

credit risk.78 Bank holdings of syndicated loans, which 

include leveraged loans, rose to more than $1.36 

trillion in fourth quarter 2022, up more than 20 percent 

from year-end 2021.79 In addition, bank holdings of 

CLOs, which contain leveraged loans, increased to at 

least $174 billion in first quarter 2023, up 13 percent 

from the end of 2021. CLO holdings are concentrated 

in the largest banks, with the top four banks by assets 

accounting for 72 percent of estimated bank-held CLOs 

and the top 20 banks by CLO holdings accounting 

for 97 percent of total CLO holdings.80 While banks 

typically hold the higher-rated parts of CLOs, they 

also have a variety of exposures to nonbank financial 

institutions that hold or arrange CLO securities. These 

interconnected risks may expose banks to stress in 

the underlying leveraged loan market in ways that are 

difficult to measure. 

Banks also earn noninterest income from underwriting 

and arranging corporate bond and leveraged loan 

issuances, making them susceptible to reduced 

revenue from these activities when issuance volumes 

fall. These types of underwriting activities are 

primarily confined to the largest banks.

While direct exposures to corporate debt markets 

through lending activities and securities holdings are 

typically concentrated in larger banks, the banking 

industry faces indirect exposures through the effects 

78 Banks may hedge a portion of this credit risk through use of credit derivatives such as credit default swaps. For more information on the amount of credit 

derivatives held by FDIC-insured banks, see FDIC Quarterly Banking Profile Table VI-A.

79 Board of Governors of the Federal Reserve System, Financial Accounts of the United States—Enhanced Financial Accounts.

80 Federal Deposit Insurance Corporation, Call Reports. CLO data are reported only by banks with at least $10 billion in assets, so these numbers do not include 

any holdings by banks below that threshold.

81 PitchBook LCD.

82 S&P Global, “U.S. Weekly Economic Commentary: 2023 Recession;” The Conference Board, “December Economic Update 2022.”

83 Board of Governors of the Federal Reserve System, “Summary of Economic Projections,” December 14, 2022.

84 Deutsche Bank, “Default Study—2023: Return of the Boom-Bust Cycle,” May 31, 2023.

85 S&P Global Ratings, “Credit Conditions North America Q2 2023,” March 28, 2023; Deutsche Bank, “Return of the Boom-Bust Cycle.” 

of corporate debt distress on economic conditions. 

Significant corporate debt distress could exacerbate 

an economic downturn by forcing firms to pull back 

on investment and lay off employees. This reduction 

in employment and business activity could lead to 

increased delinquencies and defaults for bank C&I, 

CRE, and other loans.

Slowing economic growth and continued high 

interest rates could weigh on corporate debt 

markets and pose credit risk for the banking 

industry, while limited near-term corporate debt 

maturities should mitigate some risks. Corporations 

extended their debt maturities between 2020 and 

2022, taking advantage of lower interest rates in 

the early part of the pandemic and thereby limiting 

refinancing needs in 2023 and 2024, which could help 

to mitigate default risk in the near term (Chart 32).81

However, an uncertain economic outlook, including 

the possibility of a recession, could lead to lower 

corporate profitability, which could adversely affect 

repayment and increase refinancing risks across 

some issuers, particularly those in adversely affected 

industries.82 In addition, borrowing costs could 

continue to rise further through 2023 if benchmark 

interest rates, such as Treasuries, continue to rise or if 

the market perceives higher credit risk in the corporate 

debt market, which could translate into increased 

spreads on corporate debt relative to Treasury 

rates.83 These factors could constrain the ability of 

corporations to service their debt.84 Rising corporate 

defaults would affect holders of corporate debt 

securities, including banks. Analysts expect corporate 

defaults to increase through 2023 but remain at or 

below long-term averages before increasing further in 

2024, in line with past default cycles.85 Corporations 

facing financing constraints could pull back on 

employment and investment, propagating their 

distress into other parts of the economy.
50 | 2023 Risk Review

Nonbank Financial Institution Lending

• As the nonbank financial sector has continued to expand, so has lending by banks to nonbank financial 

institutions (NBFIs). 

• Loans to NBFIs remained concentrated among the largest banks, and funded balances continued to rise 

through first quarter 2023. 

• Community bank exposure to NBFIs remained small, and outstanding loans to these institutions contracted 

through first quarter 2023. 

• While credit quality measures on NBFI loans remained favorable, bank exposure to risks of nonbank 

business activities has increased. 

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

87 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. 

88 Capital is defined as tier 1 capital and credit loss reserves for loans and leases.

89 Financial Stability Oversight Council, 2022 Annual Report.

The banking industry continued to increase 

lending to nonbanks through first quarter 2023.

The nonbank financial sector continued to expand, 

with direct bank lending to NBFIs growing in tandem. 

Banks held $761 billion in funded loan commitments 

to NBFIs in first quarter 2023, a record high.86 During 

first quarter 2023, a quarter of relatively tepid overall 

total loan growth in the banking industry, the yearover-year growth rate in NBFI lending continued to 

outpace growth rates in all other major loan portfolios 

(Chart 33).

Banks lend to many different types of NBFIs, including 

investment firms, financial vehicles, nonbank real 

estate lenders, insurers, transaction processors, and 

other entities. Banks provide credit-line commitments 

to these firms, and NBFIs rely on these lines as a key 

source of liquidity for day-to-day operations and for 

funds to lend or to invest.

Loans to NBFIs are concentrated among global 

systemically important banks (GSIBs) and 

represented a considerable share of GSIB capital 

in first quarter 2023. GSIBs represent more than 60 

percent of loans to NBFIs at insured institutions. GSIBs 

reported 9.2 percent growth in funded NBFI balances 

year over year in first quarter 2023.87 Funded NBFI 

loan concentrations at GSIBs reached 50.9 percent of 

capital in first quarter 2023, up from 39.5 percent at 

year-end 2019 (Chart 34).88 In addition to credit-line 

commitments, GSIBs issue term loans, asset-based 

loans, and other facilities to nonbanks. While GSIBs 

lend to a wide variety of nonbank entities, their largest 

commitments tend to be to investment firms and 

financial vehicles.

Community bank exposure to nonbank entities has 

declined through first quarter 2023. Only 8.8 percent 

of community banks had funded commitments to 

nonbanks, and their loan commitments to NBFIs 

declined 18.6 percent from year-end 2021. These loans 

account for a small portion—0.95 percent—of total 

community bank lending. Supervisory observations 

suggest that most lending to NBFIs by community 

banks is through warehouse lines of credit to nonbank 

mortgage companies. As mortgage origination 

declined amid rising interest rates, many nonbank 

mortgage companies reduced their credit-line usage at 

banks. 

The nonbank mortgage industry was challenged by 

a decline in housing activity that occurred in late 

2022 as mortgage rates rose. Nonbank mortgage 

companies could come under further pressure in a 

potential recession and sustained high interest rate 

environment. Some nonbank mortgage lenders 

loosened underwriting standards and offered new 

products to maintain origination volume while 

maintaining limited loss-absorbing capacity. Nonbank 

mortgage servicers could face acute liquidity pressures 

in the event of widespread delinquencies as some 

servicers have to repurchase distressed mortgages 

while maintaining investor payments.89
2023 Risk Review | 51

Annual Loan Growth Rate

Percent

Source: FDIC.

CHART 33

Growth in Nonbank Financial Institution Lending Outpaced Other Major 

Loan Categories 

18.3

16.3 15.4

13.9

5.0

12.0

-15

-10

-5

0

5

10

15

20

25

30

35

Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023

Commercial and Industrial

Consumer

Agriculture

Commercial Real Estate

1–4 Family

Funded Loans to Nonbank Financial Institutions

Funded Nonbank Financial Institution Loans to Tier 1 Capital Plus Credit Loss Reserves for Loans and Leases

Percent

Source: FDIC.

Note: Quarterly data through first quarter 2023.

CHART 34

GSIBs Have the Highest Concentration of Loans to Nonbank 

Financial Institutions 

0

5

10

15

20

25

30

35

40

45

50

55

60

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

GSIB Loans to Nonbanks

Noncommunity Bank Loans to Nonbanks (Excluding GSIBs)

Community Bank Loans to Nonbanks

Total Industry Bank Loans to Nonbanks
52 | 2023 Risk Review

Despite current favorable credit risk metrics, bank 

exposures to nonbanks pose potential future risks. 

While asset quality measures remained favorable 

on bank loans to NBFIs through first quarter 2023, 

some NBFIs do not have access to stable funding 

sources, making them vulnerable to credit distress 

during periods of market disruptions and economic 

weakness. In exchange for higher yield, some NBFIs 

that extend credit may assume higher credit and 

liquidity risks than those typically borne by banks. 

Bank lending to riskier NBFIs can thus indirectly 

transmit increased credit and liquidity risks to their 

own balance sheets. Similarly, some research has 

found that compared with banks, NBFIs serve riskier 

borrowers and limit lending more during financial 

shocks.90 For example, some research suggests that 

NBFI loan origination during the Great Recession 

declined 96 percent compared with 26 percent for 

banks. During the pandemic, NBFI loan originations 

declined 85 percent, while bank lending increased.91

NBFIs could experience defaults from their borrowers 

or losses due to weakened investments, which would 

affect their ability to repay debt. 

90 Iñaki Aldasoro, Sebastian Doerr, and Haonan Zhou, “Nonbank Lending During Crises,” Bank for International Settlements and Princeton University, June 2023.

91 Quirin Fleckenstein, Manasa Gopal, German Gutierrez Gallardo, and Sebastian Hillenbrand, “Nonbank Lending and Credit Cyclicality,” NYU Stern School of 

Business, June 2020.

92 The NBFI utilization of lines of credit is defined as funded loans to NBFIs as a percent of total funded and unfunded commitments to bank and nonbank entities 

(RC-L.1.e.(2)).

In addition to higher delinquencies or defaults, a 

drawdown by NBFIs on credit lines in a time of stress 

could translate into liquidity pressures at banks that 

extend credit to NBFIs. At the onset of the pandemic in 

early 2020, NBFIs drew down their lines at banks amid 

increased economic uncertainty. In first quarter 2020, 

funded NBFI loans surged $86.1 billion (17.6 percent) 

from the prior quarter, while unfunded commitments 

to these institutions shrank $44.0 billion (10.3 percent). 

The utilization rate on NBFI lines of credit, defined 

as total funded commitments to NBFIs provided by 

banks as a percentage of total funded and unfunded 

commitments, increased to 60 percent, up from 53 

percent in fourth quarter 2019 before the start of the 

pandemic.92 While the utilization rate on credit lines 

to NBFIs was approximately 54 percent in first quarter 

2023, relatively unchanged from year-end 2022 and 

down from the 2020 high, the banking industry’s loan 

exposure to nonbanks has increased since before the 

pandemic, both in terms of dollar amount and as a 

share of capital.
2023 Risk Review | 53

Small Business Lending

• High inflation and labor market shortages challenged small businesses in 2022. Small business conditions 

varied across industries as consumer spending patterns shifted toward services.

• Community banks remained an important source of small business lending. 

• Commercial and industrial (C&I) loan asset quality, a proxy for small business loan performance, remained 

relatively sound through first quarter 2023, but uncertain small business conditions may be a source of 

credit risk.

93 Despite overall growth in 2022, PCE growth was down considerably from 2021 and declined during the last two months of 2022. Weakness during the end of 

2022 could signal future challenges for small businesses. See U. S. Bureau of Economic Analysis, Table 2.3.6U, Real Personal Consumption Expenditures by Major 

Type of Product and Major Function, accessed January 31, 2023. 

94 NFIB Small Business Optimism Index, May 2023.

Small businesses have faced higher inflation and 

labor market shortages since 2021 and experienced 

a shift in consumer spending patterns that 

benefited some businesses more than others.93

The National Federation of Independent Business 

(NFIB) reported that labor market shortages and 

inflation remained a top concern for small businesses 

in May 2023. Twenty-five percent of owners reported 

inflation as their single most important business 

problem, up from 2021 levels but down from a peak 

of 37 percent in July 2022. About the same share of 

respondents reported quality of labor a concern, and 44 

percent of owners reported they had job openings that 

were hard to fill.94

Recent trends in consumer spending may affect 

conditions for small businesses and the formation 

of new small businesses across industries. While real 

personal consumption expenditures (PCE) growth 

slowed from strong levels in 2021, it remained closer 

to pre-pandemic rates through first quarter 2023. After 

broad gains in consumer spending across industries 

Small business lending is a key component of many bank lending portfolios nationwide. 

Source: FDIC.

Note: U.S. territories are not included in the map. Three banks in Guam and one bank in the Federated States of Micronesia with a concentration 

of small business loans are not shown.

* Small business loans data are reported only in second quarter and fourth quarter of the year.

Regional Exposure to Small Business Lending

Dots on the map represent the 1,865 banks (40 percent of all banks) with small business loans above 75 percent of total C&I loans at

the end of fourth quarter 2022.

Almost 40 percent of banks (1,865) have total small business loans greater than 75 percent of total commercial 

and industrial (C&I) loans as of December 31, 2022.* Small business loans are defined as C&I loans less than 

$1 million.
54 | 2023 Risk Review

in 2021, consumer spending shifted from goods to 

services in 2022. Services spending was led by growth 

in recreation, transportation, and food services and 

accommodation, such as restaurants and take-out 

services. The decline in goods expenditures was led 

by reduced spending on motor vehicles and parts 

and food and beverages in 2022 that improved in first 

quarter 2023.95 Consistent with the shift from goods to 

services consumption since 2021, new applications for 

small businesses rose for service-based businesses, 

such as accommodation and food services, and 

declined for retail trade and transportation and 

warehousing (Chart 35).96

Banks reported a continued slowdown in small 

business lending in 2022, reflecting the winding 

down of Paycheck Protection Program (PPP) 

lending. Small business loans are defined as C&I loans 

less than $1 million and are reported in Call Reports 

semiannually on June 30 and December 31. The 

banking industry’s small business lending portfolio 

also includes Small Business Administration lending. 

95 The food and beverage category is solely for purchases for off-premise consumption.

96 U.S. Census Bureau, “Business Formation Statistics Monthly Data Release,” press release, May 12, 2023. 

97 Banks report C&I loans less than $1 million semiannually as of June 30 and December 31, and these measures do not include delinquency rates. Lines of credit, 

CRE loans, and other types of loans that may not be separately identified in Call Report data.

After rising in 2020 primarily due to the introduction of 

the PPP program, small business lending declined for 

both community and noncommunity banks in 2022, 

reflecting in part the forgiveness and repayment of 

most PPP loans. The amount of small business loans 

outstanding normalized to the 2019 level by year-end 

2022 (Chart 36).97

Community banks remained an important source 

of small business lending. Community banks 

maintained an outsized share of the banking industry’s 

total small business loans in 2022 at 23.6 percent, 

despite holding only 14.7 percent of total industry 

loans. This share is significantly higher than the 

community bank share of total C&I loans, which was 

9.5 percent at year-end 2022. Total small business 

loans at community banks declined by $50.9 billion 

from 2020 through year-end 2022, reflecting in part the 

decline in PPP loans outstanding. While the amount 

of PPP loans held by community banks that meet the 

small business loan definition is not available, 

CHART 35

Business Applications Have Increased for Certain Service Industries Since 2021

Source: Census Bureau (Haver Analytics).

Note: Monthly data through April 2023.

Index (2018 = 100)

0

5

10

15

20

25

30

Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23

Total

Accommodation & Food Services

Professional Services

Retail Trade

Transportation & Warehousing

Health Care & Social Assistance
2023 Risk Review | 55

$ Billions

Source: FDIC.

Note: Annual data from 2018 to 2022. Small business loans include loans made under the Paycheck Protection Program. 

CHART 36

Small Business Loans Have Declined in Recent Years, Returning to 

Pre-Pandemic Levels

0

50

100

150

200

250

300

350

400

450

2018 2019 2020 2021 2022

Noncommunity Bank Small Business Loans

Community Bank Small Business Loans

by year-end 2022 only $2.2 billion in total PPP loans 

was outstanding at community banks as the program 

ended, down from $105.2 billion at year-end 2020. 

While small business loans held by community banks 

declined in 2022, community banks continued to make 

business loans. Annual C&I loan growth, net of PPP 

loans, reported by community banks was 18.0 percent 

in fourth quarter 2022. C&I loan growth slowed in first 

quarter 2023 to 0.7 percent, reflecting bank concerns 

about economic uncertainties.

The community bank early-stage past-due and 

noncurrent rate on C&I loans remained relatively 

low through first quarter 2023. In the absence 

of asset quality data reported by banks for small 

business loans, loan performance measures for 

banking industry C&I loans have historically been a 

good proxy for small business loan performance. The 

C&I early-stage past-due rate and the noncurrent rate 

reported by community banks declined at the onset 

of the pandemic and remained favorable through 

98 NFIB Small Business Optimism Index, May 2023.

99 Net numbers reflect the difference between respondents who report a positive belief or position and those who report a negative belief or position, meaning 

negative numbers represent more negative than positive responses. 

first quarter 2023. Both rates were below levels 

reported by noncommunity banks. C&I asset quality 

of noncommunity banks also remained below the prepandemic averages as of first quarter 2023 (Chart 37). 

Small businesses reported weaker conditions in 

early 2023, which may be a source of credit risk 

for banks. Small business owners reported concerns 

about conditions in the near term. The May 2023 NFIB 

survey reported that the Optimism Index remained 

low at 89.4, down from 2021 levels.98 Further, a net 

negative 50 percent of survey respondents said they 

believed that business conditions will improve over 

the next six months, according to the survey.99 The 

last net positive survey response for this measure was 

in November 2020. Higher interest rates combined 

with weaker business conditions may make it more 

difficult for small business owners to meet their debt 

repayment requirements and may pressure asset 

quality of bank loans to small businesses in 2023. 
56 | 2023 Risk Review

Percent

Source: FDIC.

Note: Quarterly data through first quarter 2023. 

CHART 37

Community Bank Commercial and Industrial Loan Early-Stage Past-Due and 

Noncurrent Rates Are Lower Than Noncommunity Bank Rates

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Community Bank Noncurrent Rate

Community Bank Early-Stage Past-Due Rate

Noncommunity Bank Noncurrent Rate

Noncommunity Bank Early-Stage Past-Due Rate
2023 Risk Review | 57

SECTION 4

Market Risks 

Liquidity and Deposits

• Liquid asset levels among community banks declined during 2022 and continued to fall in first quarter 

2023, in part reflecting securities losses and higher loan growth reducing cash balances. Liquid assets 

remained above the pre-pandemic level. 

• Deposit levels grew among community banks, despite the decline in the industry overall. 

• Community banks increased holdings of brokered deposits and Federal Home Loan Bank (FHLB) 

borrowings in 2022 and first quarter 2023 compared with 2021, and high unrealized securities losses 

remain a concern. 

• Rising interest rates and changing economic conditions may contribute to increased liquidity risk. 

On-balance sheet liquidity includes noninterest-bearing cash, interest-bearing cash, unpledged securities, 

federal funds sold, and securities purchased under resale agreements. With interest rates rising, many 

community bank securities portfolios reflect unrealized losses, making those assets a less favorable primary 

liquidity option. 

Source: FDIC.

Note: Short-term liquid assets include all cash balances, securities with maturities less than one year, federal funds sold, and securities purchased 

under agreement to resell. 

Five Percent of Community Banks Report Low Levels of Short-Term Liquid Assets

Dots on the map represent the 198 community banks (4 percent of all banks) that report short-term liquid asset ratios below 

2 percent total assets in first quarter 2023 

• About 96 percent of community banks report some degree of unrealized losses in their

securities portfolio, with 36 percent of community banks reporting unrealized losses higher than 25 percent of 

tier 1 capital.

• Short-term liquid asset ratios among community banks increased slightly in first quarter 2023 due to increased 

cash holdings. 

• However, more community banks (198) report short-term liquid assets below 2 percent of total assets through 

first quarter 2023 compared to pre-pandemic 2019. 
58 | 2023 Risk Review

Liquid assets among community banks declined 

in 2022 and continued to fall in first quarter 2023. 

Among community banks, liquid assets to total 

assets declined to 20 percent at year-end 2022, down 

from nearly 27 percent in 2021 (Chart 38). This ratio 

continued to decline in first quarter 2023, with liquid 

assets falling to 19 percent of total assets and nearing 

the 2019 pre-pandemic level of 18 percent. Most 

liquid assets (more than 64 percent) were composed 

of securities, which depreciated considerably in 2022 

amid rising interest rates. Although reduced from the 

2021 level, the community bank liquidity ratio, which 

reflects the effects of unrealized losses, continued 

to exceed the 2019 pre-pandemic level through first 

quarter 2023. For many community banks, cash 

assets increased significantly early in the pandemic, 

with much of that increased liquidity the result of 

household stimulus money and proceeds from small 

business Paycheck Protection Program loans. 

The most readily available liquidity sources, such 

as cash and due from accounts and federal funds 

sold, decreased the most since 2021. However, cash 

balances rose in first quarter 2023 as banks increased 

wholesale funding in response to uncertainty caused 

by recent bank failures. This caused short-term 

liquidity to improve during the quarter despite 

the overall decline in total liquid assets. Among 

community banks, the median short-term liquid assets 

to total assets ratio decreased from 14.5 percent in 

2021 to 8.0 percent in 2022 before improving slightly 

to 8.6 percent in first quarter 2023. Noncommunity 

banks reported a similar trend in short-term liquid 

assets to total assets, with the ratio decreasing from 

12.1 percent in 2021 to 6.0 percent in 2022 before 

improving to 7.7 percent in first quarter 2023.

Community bank deposits grew, even as deposits 

declined for the total industry through first quarter 

2023. After unprecedented deposit growth during the 

pandemic, deposits reported by the banking industry 

began to normalize with total industry deposits 

declining by 4.9 percent between 2021 through 

early 2023, bringing total deposits to $18.7 trillion at 

first quarter 2023. High inflation and rising interest 

rates contributed to the decline in deposits, creating 

CHART 38

Community Bank Liquid Assets Decreased

Source: FDIC.

Note: The liquid assets to total assets ratio is a weighted average. Annual data except for first quarter 2023.

$ Billions Liquid Assets to Total Assets

Percent

275

406 375 329

106

282

119

141

21

18

22

27

20

19

0

5

10

15

20

25

30

0

100

200

300

400

500

600

700

800

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 1Q2023

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)
2023 Risk Review | 59

increased deposit competition for some banks. A 

reduction in uninsured deposits in first quarter 2023 

contributed to the decline in total industry deposits. 

Although down considerably from the 2021 level, 

aggregate industry deposits remained much higher 

than the 2019 pre-pandemic level of $14.5 trillion. 

Despite the aggregate industry decline in deposits, 

community bank deposits grew 3.5 percent in 2022 

and 0.5 percent in first quarter 2023. The bank 

failures in March 2023 prompted depositor concerns 

and resulted in withdrawal pressures for uninsured 

deposits. Community banks tend to rely less on 

uninsured deposits than noncommunity banks and 

therefore tend to be less vulnerable to outflows of 

uninsured deposits.100 As of first quarter 2023, banks 

with assets under $10 billion, most of which are 

considered community banks, reported a median 

uninsured deposits to total assets ratio of 20 percent 

compared to the largest banks, which reported 

100 The estimated amount of uninsured domestic deposits is derived by subtracting the multiple of the standard maximum deposit insurance amount, as defined 

under 12 CFR 330.1(o) (currently $250,000), and the number of deposit and retirement accounts of more than the standard maximum deposit insurance amount 

(Schedule RC-O, Memoranda Items 1.b.(2) and 1.d.(2)) from the amount of deposit and retirement accounts of more than the standard maximum deposit 

insurance amount (Schedule RC-O, Memoranda Items 1.b.(1) and 1.d.(1)). Public deposits above the standard maximum deposit insurance amount equally are 

considered uninsured, even if the amounts are collateralized.

median uninsured deposits to total assets above 34 

percent in first quarter 2023 (Chart 39). In first quarter 

2023, noncommunity banks reported a 1.3 percent 

decline in total deposits, with most of that drop in 

uninsured deposit balances. Although community 

banks experienced a similar rate of uninsured deposit 

runoff, growth in insured balances of 3.7 percent more 

than offset a runoff of uninsured deposits during the 

quarter.

Community banks reported stronger loan growth 

and utilized cash balances. Loan growth increased 

for community and noncommunity banks in 2022, 

with community banks reporting loan growth of 14.4 

percent compared to noncommunity bank loan growth 

of 7.8 percent. Loan growth continued modestly into 

first quarter 2023, with community banks reporting 

loan growth at 1.8 percent compared to first quarter 

loan growth for noncommunity banks at 1.0 percent 

(see the Banking Industry section of this report for 

CHART 39

Small Banks Relied Less on Uninsured Deposits to Fund Assets

Source: FDIC.

Note: Most banks under $10 Billion in assets are classified as community banks. Annual data except for first quarter 2023.

Median Uninsured Deposits to Total Assets

Percent

33

34

16

20

0

5

10

15

20

25

30

35

40

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 1Q2023

Assets > $250 Billion

Assets $10 Billion–$250 Billion

Assets < $10 Billion
60 | 2023 Risk Review

CHART 40

Community Banks Relied More on Brokered Deposits and FHLB Borrowings

Source: FDIC.

Wholesale Funds

$ Billions

Wholesale Funding to Total Assets

Percent

16%

19%

13%

17%

18%

0

4

8

12

16

20

0

100

200

300

400

500

600

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 1Q2023

State and Municipal Deposits (Le Axis) FHLB Borrowings (Le Axis)

Brokered Dep (Less Recip) (Le Axis) Fed Funds/Repos Purch (Le Axis)

Internet Deposits (Le Axis) Other Borrowings (Le Axis)

Brokered Recip (Le Axis) Foreign Dep (Le Axis)

Wholesale Funding to TA (Right Axis)

more information on loan growth trends). As loan 

demand outpaced deposit growth, community banks 

used on-balance sheet liquidity to fund new loans in 

2022, primarily by drawing down interest-bearing cash 

accounts (Chart 38). On-balance sheet cash positions 

improved in first quarter 2023 as more community 

banks began building up cash from wholesale funding 

sources to safeguard liquidity. 

As liquid asset levels contracted, wholesale 

funding among community banks increased. 

Rising interest rates contributed to high unrealized 

losses on securities during 2022, and market stress 

concerns in first quarter 2023 led more banks to 

secure precautionary borrowing. Instead of liquidating 

securities and realizing losses, more community banks 

supported growing loan demand with increased 

wholesale funding, such as FHLB borrowings and 

brokered deposits. Through first quarter 2023, 

community banks reported that wholesale funding 

101 For more information, see the Federal Reserve’s description of the Bank Term Funding Program.

102 Many states require banks to secure the uninsured or entire balance for deposits of government entities such as state or local municipalities, with some states 

also imposing placement requirements that include minimum condition standards, such as specific capital levels, for the bank receiving the deposits. 

made up more than 18 percent of total assets, up from 

13 percent in 2021 and above the 2019 pre-pandemic 

level (Chart 40). 

For those banks with significant unrealized losses, 

certain counterparties such as the FHLB and large 

municipal or institutional depositors may impose 

restrictions on funding. To manage these and 

other risks to bank liquidity arising from securities 

depreciation, the Federal Reserve created the Bank 

Term Funding Program (BTFP) in March 2023. The 

BTFP provides liquidity to deposit institutions by 

lending at par against eligible collateral.101

The composition of wholesale funds held by banks 

tends to vary between community and noncommunity 

banks. Traditionally, community banks report a higher 

proportion of municipal and state funds compared to 

noncommunity banks (noncommunity banks report 

more in brokered deposits).102 Through first quarter 
2023 Risk Review | 61

2023, municipal and state funds accounted for more 

than 46 percent of wholesale funds reported by 

community banks, followed by FHLB borrowings at 

22 percent and brokered deposits at 20 percent. In 

comparison, noncommunity bank wholesale funds 

tend to be more widely sourced, led by brokered 

deposits at 25 percent, FHLB borrowings at 19 percent, 

and other borrowings at 15 percent. In response to 

the bank failures in March 2023, both community 

banks and noncommunity banks reported increased 

precautionary borrowings in the first quarter as many 

banks looked to build up cash.

Rising interest rates and changing economic 

conditions may contribute to increased liquidity 

risk. Continued inflationary concerns and 

expectations for sustained higher interest rates may 

heighten liquidity risk among community banks, 

particularly if securities portfolios depreciate further, 

loan growth continues, and core deposits recede 

from pandemic highs. In addition, social media 

and increased digitalization may amplify the speed 

and severity of deposit outflow, which may shorten 

available reaction time at points of deposit stress. 

The FDIC continues to focus on liquidity risks across 

the banking industry, including the impacts of bank 

failures on liquidity at institutions and implementing 

appropriate supervisory actions. 
62 | 2023 Risk Review

Net Interest Margins and Interest Rate Risk 

• Rising interest rates benefited full-year net interest margin (NIM) in 2022, which increased sharply from 

2021. But funding pressures intensified for many banks in first quarter 2023, causing NIM to decline.

• Many banks increased the share of long-term securities on their balance sheets in 2020 and 2021 amid 

weak loan demand (net of Paycheck Protection Program loans), contributing to greater interest rate risk 

across the industry. 

• Banks with a higher share of long-term assets have reported more depreciation in investment portfolios 

and less NIM improvement than other institutions.

• Banks could find managing NIM more difficult in 2023 should interest rates remain elevated or continue to 

rise amid increasing competition for deposits. 

103 See the first quarter 2023 FDIC Quarterly Banking Profile for asset size groupings. 

104 The “pre-pandemic average” refers to the period first quarter 2015 through fourth quarter 2019.

105 SOFR is the Secured Overnight Financing Rate. LIBOR is the London Interbank Offered Rate. 

106 Angela Hinton and Chester Polson, “The Historic Relationship Between Bank Net Interest Margins and Short–Term Interest Rates,” FDIC Quarterly 15, no. 2 

(2021), article 1.

107 The discrepancy between the increase in yields minus the increase in funding costs and the change in NIM is due to rounding.

The banking industry’s annual NIM rose last year 

from the record low set in fourth quarter 2021, 

but quarterly NIM declined slightly in first quarter 

2023. Industry-wide full-year NIM rose from a record 

low 2.54 percent in fourth quarter 2021 to 2.95 percent 

in fourth quarter 2022, reflecting higher asset yields 

and strong loan growth in the final three quarters 

of 2022. Noncommunity banks reported a greater 

increase in NIM than did community banks, with a 45 

basis point increase to 2.89 percent in 2022, and more 

than 80 percent of noncommunity banks reporting an 

increase. NIM at community banks rose 17 basis points 

to 3.45 percent, with nearly two-thirds of community 

banks reporting an increase (Chart 41). 

While annual NIM performance was strong in 2022, 

quarterly trends showed mounting pressure from 

rising funding costs in late 2022 and early 2023. 

Quarterly NIM growth slowed from a record high 35 

basis point increase in third quarter 2022 to a 23 basis 

point increase in the fourth quarter before declining 7 

basis points in first quarter 2023 as the rise in funding 

costs more than offset higher asset yields (Chart 42). 

NIM compression affected all bank asset size groups 

in first quarter 2023 except for the smallest asset size 

group, those banks with total assets less than $100 

million.103 Although down from the prior quarter, 

the banking industry’s first quarter 2023 NIM of 3.31 

percent remained above the pre-pandemic average. 

Community bank NIM, which declined by a larger 

amount than the industry overall, remained higher 

than that of noncommunity banks.104 The last time 

quarterly NIM declined was first quarter 2022, when it 

declined by 1 basis point.

In contrast to first quarter 2023, bank funding costs 

did not rise as fast as short-term market rates last year, 

allowing banks to benefit from higher NIMs despite 

an inverted yield curve. During 2022, the increase in 

NIM was primarily due to two factors: the steep rise 

in asset yields that outpaced rising funding costs and 

strong growth in loan balances throughout 2022. 

Higher interest rates in 2022 lifted asset yields, which 

drove the increase in NIM. Reference rates of various 

maturities, such as the prime rate, SOFR, LIBOR, and 

the ten–year Treasury, all rose in 2022 as the Federal 

Reserve continued to raise its target rate.105 As is 

typical in rising interest rate environments, most 

banks were able to reprice their assets upward more 

quickly than their liabilities.106 Industry-wide quarterly 

annualized asset yields rose 183 basis points year 

over year to 4.54 percent in fourth quarter 2022, while 

quarterly annualized funding costs rose only 100 

basis points in the same period. As a result, between 

fourth quarter 2021 and fourth quarter 2022, NIM 

for the banking industry rose 82 basis points, setting 

another record as the largest year–over–year increase 

in quarterly NIM in available data. 107 All components of 

interest income contributed to the increase in industry 

yield, but the largest driver of the increase was interest 
2023 Risk Review | 63

CHART 41

NIM Rose in 2022 for the First Time Since 2018

Source: FDIC.

Note: Full-year weighted average net interest margin as of fourth quarter each year.

Full-Year Net Interest Margin

Percent

3.45

2.89

2.95

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Community Banks

Noncommunity Banks

Industry

Quarter-Over-Quarter Change in Industry NIM Components

Basis points Percent

Source: FDIC.

Note: Quarterly weighted average yield on earning assets and cost of funds; quarterly data through first quarter 2023. Target Federal 

Funds Rate is upper limit of target.

CHART 42

NIM Declined in First Quarter as the Average Cost of Funds Rose More Than

the Average Yield on Earning Assets 

-5

-3

-1

1

3

5

7

-80

-60

-40

-20

0

20

40

60

80

100

Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22 Mar-23

Yield on Earning Assets (Le Axis)

Cost of Funds (Le Axis)

NIM (Le Axis)

Target Federal Funds Rate (Right Axis)
64 | 2023 Risk Review

income on loans. Among loan categories, loans 

secured by non-1–4 family real estate and commercial 

and industrial loans contributed the most to the 

increase in asset yields. After loans, the next largest 

contributor to the increase in industry asset yields 

between December 2021 and December 2022 was 

cash and balances due from depository institutions. 

Total loans and cash and due from balances were also 

the largest contributors to the increase in asset yields 

reported in first quarter 2023.

Strong loan growth during 2022 shifted earning 

asset composition and enhanced the positive 

effect of higher loan yields on NIM before slowing 

in first quarter 2023. The industry reported strong 

nominal loan growth of 8.7 percent in 2022, well 

above historical annual loan growth rates. Strong 

loan growth in 2022 shifted the industry composition 

of bank assets away from record-level holdings of 

lower-yielding cash and securities back toward greater 

proportions of higher-yielding loans. By first quarter 

2023, the industry ratio of cash and securities to assets 

had declined from a record high 41.3 percent in fourth 

quarter 2021 to 35.6 percent, and the industry ratio 

of loans to assets had risen from a record low 47.0 

percent in third quarter 2021 to 51.5 percent (Chart 

43). In contrast to loan growth during 2022, loan 

balances declined 0.1 percent in first quarter 2023, 

moderating the positive effects of lending activity on 

NIM. This contributed to the slowing of growth in asset 

yields in first quarter: growth in asset yields declined 

from more than 70 basis points per quarter in third 

and fourth quarter 2022 to 38 basis points in first 

quarter 2023.

Industry funding costs continued to rise through 

first quarter 2023, driven by expense on time 

deposits. Industry-wide quarterly funding costs rose 

100 basis points to 1.16 percent between December 

2021 and December 2022. At that time, this was the 

CHART 43

Bank Balance Sheet Compositions Began to Normalize in 2022

Source: FDIC.

Note: Quarterly data through first quarter 2023.

Percent of Assets

79

51

36

0

10

20

30

40

50

60

70

80

90

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Deposits

Total Loans and Leases

Cash, Balances Due From Depository Institutions, and Securities
2023 Risk Review | 65

largest year-over-year increase since third quarter 

2006.108 The largest contributors to the increase 

in funding costs throughout 2022 were savings 

deposits and interest–bearing transaction accounts. 

Noncommunity banks, which typically hold greater 

shares of rate-sensitive deposit accounts, reported a 

much larger increase in the cost of interest-bearing 

deposits than community banks (126 basis points 

versus 70 basis points). Deposit balances declined 

in the final three quarters of 2022 and first quarter 

2023, bringing their share relative to assets closer to 

pre-pandemic levels and pressuring banks to raise 

rates on deposit products. Funding costs rose 45 basis 

points in first quarter 2023 as banks attempted to 

stem deposit outflows or sought alternative sources of 

funding. In contrast to 2022, the largest contributor to 

the increase in funding costs in first quarter 2023 was 

time deposits. As was the case in 2022, noncommunity 

banks reported a larger increase in their total funding 

costs and cost of interest-bearing deposits in first 

quarter 2023 than did community banks. 

Banks with a higher share of long–term assets to 

total assets reported a smaller increase in NIM and 

larger depreciation in securities portfolios than 

their counterparts.109 Banks that started 2022 with 

the highest share (top one-third) of long–term assets 

to total assets reported a 19 basis point increase in 

quarterly NIM between fourth quarter 2021 and first 

quarter 2023. Banks with the lowest share (bottom 

one-third), on the other hand, reported an increase 

of 98 basis points. Banks with a higher proportion of 

long-term assets that were locked in at lower rates had 

fewer opportunities to benefit from rising rates. 

The sharp rate hikes in 2022 caused significant 

depreciation in the market value of bank investment 

portfolios, reducing the value of long-term securities 

the most. (See the Banking Industry section of this 

report for more information on unrealized losses on 

securities).Banks with the highest share of long-term 

securities (those maturing or repricing in three years 

or more) to total assets reported a rate of depreciation 

108 Industry-wide quarterly funding costs rose 102 basis points year over year in third quarter 2006.

109 Long–term assets are those maturing or repricing in more than three years. Banks with the lowest share of long-term assets to total assets are those in the 

bottom third of institutions, with a share of 39.7 percent or less as of fourth quarter 2021. Banks with the highest share of long-term assets to total assets are 

those in the top third of institutions, with a share of 51.8 percent or more.

on those securities of 9.8 percent in first quarter 

2023, while banks with the lowest share reported 

depreciation of only 6.3 percent. Although 2022 proved 

to be a challenging year in terms of unrealized losses 

on bank investment portfolios, pressure lessened in 

first quarter 2023 as medium- and long-term interest 

rates declined and securities issued during lower 

interest rate environments continued to mature.

Banks could find managing NIM more difficult 

in 2023 should interest rates remain elevated or 

continue to rise amid increasing competition for 

deposits. For the greater part of 2022, banks were 

generally able to pass interest rate increases on to 

borrowers while maintaining low funding costs. 

However, toward the end of 2022, bank funding costs 

began to rise more steeply, and growth in asset yields 

moderated. By first quarter 2023, the increase in 

funding costs outpaced the increase in asset yields. 

As depositors seek stability and search for yield, it is 

plausible that increased deposit runoff could pressure 

banks to continue to raise deposit rates from last 

year’s low levels to remain competitive for deposits, 

which would add further upward pressure on funding 

costs. Given the uncertainty surrounding interest rates 

and the economy in 2023, loan growth may continue 

to be subdued and therefore provide less support to 

net interest income and NIM than was the case in 2022. 

While upward pressure on bank funding costs suggests 

a weak outlook for NIM in 2023, unrealized losses on 

investment portfolios may abate, absent additional 

rate shocks. 
PAGE INTENTIONALLY LEFT BLANK
2023 Risk Review | 67

SECTION 5

Operational Risk 

• Operational risk remains one of the most critical risks to banks. 

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

• The banking industry’s software infrastructure remains vulnerable to cyber attacks, including ransomware 

attacks and threats against third-party service providers. 

• Robust customer due diligence (CDD) policies and anti-money laundering (AML) and countering the 

financing of terrorism (CFT) compliance programs reduce the U.S. financial system’s susceptibility to illicit 

financial activity risks.

110 Andrés Portilla, Martin Boer, and Hillary Veals, “12th Annual EY-IIF Bank Risk Management Survey,” January 11, 2023.

111 Microsoft, “Microsoft Digital Defense Report 2022,” November 7, 2022.

Operational risk remains one of the most critical 

risks to banks. The increase in the number and 

sophistication of cyber attacks poses serious 

challenges to operational risk management across 

the banking industry. According to a bank risk 

management survey, cybersecurity risk was the top 

near-term risk for banks.110 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 2022, geopolitical events continued to increase 

the likelihood of cyber attacks on banks. The 

Microsoft Digital Defense Report, published in 

November 2022, stated that cyber attacks targeting 

critical infrastructure for many firms around the 

world jumped from 20 percent of all nation-state 

attacks to 40 percent. This large increase in malicious 

activity was attributed to Russia’s attempts to damage 

Ukrainian infrastructure, along with aggressive 

espionage targeting of Ukraine’s allies, including the 

United States.111

The banking industry’s information technology 

infrastructure remains vulnerable to cyber attacks, 

including ransomware attacks and threats against 

third-party providers. Ransomware continues to 

pose a significant threat to U.S. critical infrastructure 

sectors, including finance and banking, as the number 

of attacks continue to increase. Ransomware is a form 

of malicious software designed to encrypt files on a 

device, rendering any files and the systems that rely on 

them unusable. Malicious actors then demand ransom 

in exchange for decryption. Reports of such attacks 

as of 2021 exceeded recent year totals (Chart 44). 

Ransomware has the potential to disrupt core business 

activities, resulting in operational outages. It can also 

result in an inability to access critical business and 

customer data. Banks reduce the risk of a ransomware 

attack’s success and minimize its negative impacts by 

applying effective cybersecurity risk management and 

mitigation principles.

Ransomware typically leverages known software 

vulnerabilities, compromised credentials, or phishing 

emails targeting bank employees to gain access 

to networks through remote access channels. 

Ransomware developers and operators continue to 

advance their tactics and tools and offer their services 

to others using a Ransomware-as-a-Service model.

Cyber threats to third-party providers of software, 

hardware, and computing services remain an 

important source of risk to the financial industry (inset 

box). Security risks arising from compromised thirdparty software include disclosure of credentials or 

confidential data, corruption of data, installation of 

malware, and application outages. These problems 

can result in lost time, money, and customer trust. 

In addition, supply chain attacks on third-party 

software and computing services have the potential to 
68 | 2023 Risk Review

negatively affect the security and operations of a bank. 

IBM’s annual Cost of a Data Breach Report showed one 

in five data breaches were due to a software supply 

chain compromise.112 The threat of compromise from 

Log4J (a ubiquitous Java-based script) vulnerabilities 

that can allow access to network operations and data 

lingers. As of November 2022, security firms estimate 

approximately one-third of all downloads of the 

script were still pulling a vulnerable version. The U.S. 

government has warned that the “endemic” script is 

expected to persist “in the wild” for at least a decade.113

Quantum computing will pose new risks to critical 

infrastructure systems. While quantum computing 

promises greater computing speed and power, it 

also has the potential to render current encryption 

methods vulnerable. In general, traditional 

encryption relies on complex mathematical problems 

(encryption algorithms) that take an immense 

amount of time for classic computers to solve without 

knowing the encryption key. However, quantum 

computers use a different computing architecture 

that can solve certain types of problems much faster, 

including some encryption algorithms. With the 

release of quantum computing to the public, current 

encryption methods may become inadequate.114

Money laundering is also a key component of 

operational risk. Money laundering, which is the 

practice of filtering illicit proceeds through a series of 

transactions in order to camouflage the illegal nature 

of the funds, continues to pose risks to the banking 

industry because it facilitates and conceals crime. 

Further, the United States is vulnerable to terrorist 

financing and other forms of illicit finance because 

112 IBM, “Cost of a Data Breach Report 2022,” July 2022. 

113 Cyber Safety Review Board, “Review of the December 2021 Log4j Event,” July 11, 2022. 

114 Cybersecurity and Infrastructure Security Agency, “Preparing Critical Infrastructure for Post-Quantum Cryptography,” CISA Insights, August 2022. 

115 Financial Crimes Enforcement Network, “Anti-Money Laundering and Countering the Financing of Terrorism National Priorities,” U.S. Department of the 

Treasury, June 30, 2021. 

116 U.S. Department of the Treasury, “2022 National Money Laundering Risk Assessment,” February 2022. 

much of the global economy is interconnected 

with the U.S. economy and financial system. The 

federal banking agencies, in conjunction with the 

U.S Department of the Treasury’s Financial Crimes 

Enforcement Network (FinCEN), are updating their 

AML/CFT program regulations to address priorities 

identified by FinCEN.115 FinCEN recognizes that not 

every priority will be relevant to every bank, but each 

bank should review and incorporate, as appropriate, 

each priority based on the bank’s broader risk-based 

AML/CFT program. Banks need not incorporate the 

priorities into their risk-based AML/CFT programs until 

the effective date of the final revised regulations.

If a bank does not know the customer with whom 

a bank is conducting business, the U.S. financial 

system is more susceptible to money laundering, 

terrorist financing, and other illicit financial 

activity risks. Banks implement CDD policies, 

procedures, and processes to assess and mitigate 

risks associated with customers and the products and 

services offered by the bank. Still, the inability to know 

the beneficial owner of accounts maintained at U.S. 

financial institutions presents risk to the U.S. financial 

system. In 2016, the United States implemented 

the beneficial ownership rule requiring financial 

institutions to identify and verify beneficial owners 

of legal entity customers when a new account is 

opened. This approach will change once the Corporate 

Transparency Act (CTA) is fully implemented. The CTA 

will require certain companies to disclose to FinCEN 

their beneficial ownership information when they are 

formed (or for non-U.S. companies, when they register 

with a state to do business in the United States); they 

will also be required to report changes in beneficial 

owners. Beneficial ownership information helps 

address the risk within the United States, whereby 

criminals have historically been able to take advantage 

of the lack of uniform laws and regulations pertaining 

to the disclosure of an entity’s beneficial owners.116

These revisions are expected to help facilitate law 

enforcement investigations and make it more difficult 

Quantum computing will pose new risks 

to critical infrastructure systems.

While quantum computing promises greater 

computing speed and power, it also has 

the potential to render current encryption 

methods vulnerable. In general, traditional 

encryption relies on complex mathematical 

problems (encryption algorithms) that take 

an immense amount of time for classic 

computers to solve without knowing 

the encryption key. However, quantum 

computers use a different computing 

architecture that can solve certain types 

of problems much faster, including some 

encryption algorithms. With the release 

of quantum computing to the public, 

current encryption methods may become 

inadequate.114
2023 Risk Review | 69

for illicit actors to hide behind corporate entities 

registered in the United States or foreign entities 

registered to do business in the United States.117

Bank reliance on third parties to perform AML/

CFT compliance services or act as an intermediary 

between the bank and its customers may be a 

source of risk. Third parties used by a bank may not 

be subject to AML/CFT laws and regulations. Excessive 

use of third-party relationships can limit bank staff’s 

knowledge of customer account activity and impede 

the ability to verify the identity of a customer or 

beneficial owner of a legal entity customer, perform 

CDD procedures, or identify the beneficiary or 

recipient of a financial transaction, product, or service.

The dynamic nature of sanctions regulations 

increases the risk that banks process transactions 

for a sanctioned party. Financial authorities and 

governments use economic and trade sanctions based 

117 Ibid.

118 Interdiction software screens and detects transactions associated with parties recorded on the Specially Designated Nationals and Blocked Persons List issued 

by the OFAC and sanctions lists from other relevant jurisdictions.

119 “FinCEN and the U.S. Department of Commerce’s Bureau of Industry and Security Urge Increased Vigilance for Potential Russian and Belarusian Export Control 

Evasion Attempts,” FIN-2022-Alert003, June 28, 2022; and “Supplemental Alert: FinCEN and the U.S. Department of Commerce’s Bureau of Industry and Security 

Urge Continued Vigilance for Potential Russian Export Control Evasion Attempts,” FIN-2023-Alert004, May 19, 2023.

on foreign policy and national security goals against 

targeted individuals and entities such as foreign 

countries, regimes, terrorists, international narcotics 

traffickers, and those engaged in certain activities such 

as the proliferation of weapons of mass destruction or 

transnational organized crime. Since Russia’s invasion 

of Ukraine, the Office of Foreign Assets Control (OFAC) 

and the Department of State issued approximately 

1,500 new and 750 amended sanctions (i.e., changes to 

sanctions programs). Inadequate interdiction software 

implementation, ineffective supplemental processes 

(manual or automated), unknown gaps in sanctions 

screening systems, and untimely updates to a bank’s 

interdiction software increase the risk of processing 

transactions for a sanctioned party.118 The FinCEN and 

the U.S. Department of Commerce’s Bureau of Industry 

and Security (BIS) issued joint alerts urging banks to 

be vigilant against efforts by individuals or entities to 

evade BIS export controls implemented in connection 

with the Russian Federation’s invasion of Ukraine.119 

CHART 44

Ransomware Attacks Increased Significantly in Recent Years

Source: Financial Crimes Enforcement Network.

Note: Annual data from 2011 to December 2021.

Ransomware-Related Suspicious Activity Reports

Number of reports filed

0 0 9 19 60

360

217 181 216

487

1489

0

200

400

600

800

1000

1200

1400

1600

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
PAGE INTENTIONALLY LEFT BLANK
2023 Risk Review | 71

SECTION 6

Crypto-Asset Risk

• The crypto-asset sector experienced significant market volatility in 2022.

• Crypto-asset-related activities can pose novel and complex risks to the U.S. banking system that are 

difficult to fully assess.

• The FDIC, in coordination with the other federal banking agencies, has taken steps to closely monitor 

crypto-asset-related activities of banking organizations.

120 The Financial Stability Oversight Council’s report on digital assets describes crypto-assets as private sector digital assets that depend primarily on the use of 

cryptography and distributed ledger or similar technologies, Report on Digital Asset Financial Stability Risks and Regulation 2022.

121 Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, Joint Statement on 

Crypto-Asset Risks to Banking Organizations, January 3, 2023.

122 Federal Deposit Insurance Corporation, Notification and Supervisory Feedback Procedures for FDIC-Supervised Institutions Engaging in Crypto-Related 

Activities, FIL-16-2022, April 7, 2022.  

The crypto-asset sector experienced significant 

market volatility in 2022, exposing several 

vulnerabilities. In 2022, growth in the crypto-asset 

industry corresponded with an increasing interest by 

some banks to engage in crypto-asset activities.  

Crypto-assets present novel and complex risks that 

are difficult to fully assess.120 Part of the difficulty in 

assessing these risks arises from the dynamic nature of 

crypto-assets, the crypto marketplace, and the rapid 

pace of innovation. Some of the key risks associated 

with crypto-assets and crypto-asset sector participants 

include those related to fraud, legal uncertainties, 

misleading or inaccurate representations and 

disclosures, risk management practices exhibiting 

a lack of maturity and robustness, and platform 

and other operational vulnerabilities. Possible 

contagion risk within the crypto-asset sector resulting 

from interconnections among certain crypto-asset 

participants may present concentration risks for banks 

with exposure to the crypto-asset sector. Susceptibility 

of stablecoins to run risk can create the potential 

for deposit outflows for banks that hold stablecoin 

reserves.121

The FDIC and other banking regulators have taken 

several steps in light of these emerging risks.

The FDIC has generally been aware of some banks’ 

interest in crypto-asset-related activities through its 

normal supervision process. However, as this interest 

has accelerated, the FDIC determined that more 

information was needed to better understand the 

risks associated with these activities. Hence in April 

2022, the FDIC issued Financial Institution Letter (FIL) 

016-2022, which asks FDIC-supervised institutions to 

notify the FDIC of the crypto-related activities in which 

they are engaged in or intend to engage in.122 This 

FIL notes various crypto-related activities, including 

acting as crypto-asset custodians; maintaining 

stablecoin reserves; issuing crypto and other digital 

assets; acting as market makers or exchange or 

redemption agents; participating in blockchain and 

distributed ledger-based settlement or payment 

systems, including performing node functions; and 

related activities such as finder activities and lending. 

This list is not all inclusive and does not mean that the 

activity is permissible for FDIC-supervised institutions. 

These institutions were asked to provide necessary 

information that would allow the FDIC to assess the 

safety and soundness, consumer protection, and 

financial stability implications of such activities. 

While not specific to crypto-assets, the FDIC finalized 

a rule on May 17, 2022, to help address instances in 

which firms misrepresent the availability of deposit 

insurance in violation of the law. On July 29, 2022, 

the FDIC issued a fact sheet to the public on FDIC 

deposit insurance and crypto companies and an 
72 | 2023 Risk Review

advisory to FDIC-insured institutions on deposit 

insurance and dealings with crypto companies.123

Both documents address risks, concerns, and risk 

management and governance considerations related 

to misrepresentations and misconceptions about 

deposit insurance coverage in the context of cryptoassets. Since 2022, the FDIC has taken action against 

more than 85 entities that were misrepresenting the 

nature, extent, or availability of deposit insurance. 

In some instances, these firms had made misleading 

claims in connection with crypto-assets.124 For 

example, on August 19, 2022, the FDIC issued letters 

to five companies that had made false representations 

stating or implying that crypto-assets were eligible 

for FDIC insurance, demanding that they and their 

officers, directors, and employees cease and desist 

from making false and misleading statements about 

FDIC deposit insurance.125 Also, on December 13, 2022, 

the FDIC Board of Directors issued for public comment 

a proposed rule to amend its regulations on use of 

the official FDIC sign and to clarify the FDIC regulation 

regarding misrepresentations of deposit insurance.126 

More recently in January 2023, the FDIC, the Federal 

Reserve, and the Office of the Comptroller of the 

Currency (OCC) released a joint statement on 

crypto-asset risks to banking organizations.127 The 

statement reminds banking organizations that they 

should ensure that crypto-asset-related activities 

can be performed in a safe and sound manner, are 

legally permissible, and comply with applicable 

laws and regulations, including those designed to 

protect consumers (such as fair lending laws and 

123 Federal Deposit Insurance Corporation, Fact Sheet: What the Public Needs to Know About FDIC Deposit Insurance and Crypto Companies, July 28, 2022; and 

Advisory to FDIC-Insured Institutions Regarding FDIC Deposit Insurance Coverage and Dealings with Crypto Companies, FIL-35, 2022, July 29, 2022. 

124 Federal Deposit Insurance Corporation, Remarks by Chairman Martin J. Gruenberg at the Cities for Financial Empowerment Fund 2023 Bank On National 

Conference, May 23, 2023.

125 Federal Deposit Insurance Corporation, “FDIC Issues Cease and Desist Letters to Five Companies for Making Crypto-Related False or Misleading 

Representations about Deposit Insurance,” news release, August 19, 2022. 

126 Federal Deposit Insurance Corporation, FDIC Official Sign and Advertising Requirements, False Advertising, Misrepresentation of Insured Status, and Misuse of 

the FDIC’s Name or Logo, 87 Fed. Reg.78017–78037 (Dec. 21, 2022); and Notice of Proposal on FDIC Official Sign and Advertising Requirements, False Advertising, 

Misrepresentation of Insured Status, and Misuse of the FDIC’s Name or Logo, FIL-52-2022, December 13, 2022. 

127 Joint Statement on Crypto-Asset Risks to Banking Organizations, January 3, 2023. 

128 Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, Joint Statement on 

Liquidity Risks to Banking Organizations Resulting From Crypto-Asset Market Vulnerabilities, February 23, 2023.

prohibitions against unfair, deceptive, or abusive 

acts or practices). Also, in February 2023, the FDIC, 

Federal Reserve, and OCC issued a Joint Statement 

on Liquidity Risks to Banking Organizations Resulting 

from Crypto-Asset Market Vulnerabilities on the 

liquidity risks to banking organizations presented by 

certain sources of funding from crypto-asset-related 

entities.128 This statement highlights key liquidity risks 

associated with crypto-assets and crypto-asset sector 

participants that banking organizations should be 

aware of. In particular, certain sources of funding from 

crypto-asset-related entities may pose heightened 

liquidity risks to banking organizations due to the 

unpredictability of the scale and timing of deposit 

inflows and outflows. The statement reminds banking 

organizations to apply existing risk management 

principles and provides examples of practices that 

could be effective. The agencies also continue to 

emphasize that banking organizations are neither 

prohibited nor discouraged from providing banking 

services to customers of any specific class or type, as 

permitted by law or regulation. 

The FDIC, in coordination with the other federal 

banking agencies, continues to closely monitor cryptoasset-related exposures of banking organizations. As 

warranted, the FDIC will issue additional statements 

related to engagement by banking organizations in 

crypto-asset-related activities. The FDIC also has 

developed processes to engage in robust supervisory 

discussions with banking organizations regarding 

proposed and existing crypto-asset-related activities. 
2023 Risk Review | 73

SECTION 7

Climate-Related Financial Risk

• Increased frequency and severity of severe weather and climate events present challenges and emerging 

risks to the banking industry.129

• In 2022, severe weather and climate events included three hurricanes, an extensive wildfire, and a 

prolonged drought in the West. Estimated damages from these events were among the most costly since 

reporting began.130

• The FDIC is expanding efforts to better understand climate-related financial risk in a thoughtful and 

measured approach that emphasizes collaboration with other supervisors and industry. 

• The FDIC will continue to encourage financial institutions to consider climate-related financial risk in a 

manner that allows banks to prudently meet the financial services needs of their communities.

129 Banks are likely to be affected by both the physical risks and transition risks associated with climate change, collectively referred to as “climate-related 

financial risk.” The Risk Review is a retrospective review of risks in 2022, and this section focuses solely on physical risk from severe climate and weather events 

that occurred in 2022 through early 2023. 

130 “Severe” weather and climate events in this report are those that caused at least $1 billion in damages. See NOAA, National Centers for Environmental Information, 

Billion-Dollar Weather and Climate Disasters (2023). Estimates are as of June 8, 2023, and are adjusted for inflation using the 2023 Consumer Price Index.

Severe weather and climate events in 2022 exposed banks to increased physical risk. 

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

U.S. Drought Monitor, and FDIC.

Note: Hurricane counties are FEMA disaster-declared counties eligible for individual assistance for Hurricanes Ian, Nicole, and Fiona. Wildfire counties

are counties within the perimeter of the Hermits Peak/Calf Canyon Fire in New Mexico, the largest and most destructive wildfire in 2022 in the

contiguous United States. All of the counties that were aected by the wildfire also experienced “exceptional drought” conditions in 2022.

Drought counties are counties that experienced 12 weeks of exceptional drought during 2022. Bank structure data as of first quarter 2023.

Regional Exposure to 2022 Severe Weather and Climate Events

Dots on the map represent the 353 banks headquartered in counties aected by severe hurricanes, wildfires, and drought in 2022.

• Eighteen severe weather and climate events (over $1 billion in estimated damages) occurred in the United States

in 2022, including three hurricanes, wildfires, and a major drought.

• The counties affected by those hurricanes, drought, and wildfires were home to 353 bank headquarters and

7,543 bank branches.

• Of the 353 institutions affected by the severe weather and climate events in 2022, 309 (87.5 percent) were

headquarters of community banks and 1,596 (21 percent) were community bank branches.

Legend

Bank Headquarters Location

Drought Counties

Drought and Wildfire Counties

Hurricane Counties

!
74 | 2023 Risk Review

Increased frequency and severity of climate and 

weather events present challenges and emerging 

risks to the banking industry. Historically, the 

financial industry and banks in particular have 

effectively managed the effects of severe weather 

events, such as hurricanes, wildfires, and drought. 

However, changes in climate conditions, including 

increasing frequency and intensity of severe climate 

and weather events and other natural disasters, will 

likely pose additional risks to the financial system and 

challenges to individual banks. 

The financial system, including banks, will likely be 

affected by both physical and transition risk associated 

with climate change. Together, these risks are referred 

to as climate-related financial risks. Physical risks 

generally 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 generally refer to financial risks to 

131 Martin J. Gruenberg, “The Financial Risks of Climate Change,” American Bankers Association Annual Convention, October 3, 2022.

certain institutions or industry sectors that arise over 

time from the process of adjusting toward a lowercarbon economy, which may be prompted by changes 

in climate and environmental policy, technology, or 

market sentiment.131 The Risk Review is a retrospective 

review of risks in 2022, and this section focuses solely 

on physical risk from severe climate and weather 

events that occurred last year. As such, transition 

risks, which are prospective and may take longer 

to manifest, are not included in this retrospective 

discussion. 

The severe climate and weather events in 2022 

were among the most costly since reporting began.

The frequency and estimated cost of severe climate 

and weather events on an inflation-adjusted basis 

have steadily increased since the National Oceanic and 

Atmospheric Administration (NOAA) started tracking 

these events in 1980 (Chart 45). Since 1980, there have 

been 357 severe climate and weather events, defined 

as events with estimated inflation-adjusted 

Total Event Count

Number

Total Event Cost

$ Billions (inflation-adjusted)

Source: NOAA-NCEI.

Note: Natural disasters include droughts, floods, freezings, severe storms, tropical cyclones, wildfires, and winter storms that caused at least $1 billion in damages. Data are annual figures from 1980 through 2022.

CHART 45

Estimated Damages From United States Severe Climate and Weather-Related 

Events in 2022 Were Among the Most Costly 

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)
2023 Risk Review | 75

direct damages of $1 billion or more.132 These events 

are estimated to have cumulatively cost more than 

$2.5 trillion. In 2022, NOAA reported 18 separate $1 

billion climate and weather events, slightly fewer than 

in the record years of 2020, when 22 events occurred, 

and 2021, when 20 events occurred. However, the 

$175.2 billion in estimated damages to structures and 

business interruptions from the 2022 severe climate 

and weather events was higher than in each of the 

previous two years and was the third-highest amount 

since 2000 on an inflation-adjusted basis. 

During the first five months of 2023, there were nine 

separate severe climate and weather events in the 

United States, resulting in estimated damages of 

$23.7 billion. These included seven separate rounds 

of thunderstorms and tornadoes in the South and 

Central United States, a flooding event in California, 

and a winter storm in the Northeast. Comparatively, 

only 2017 and 2020 had a greater number of severe 

climate and weather events in the first five months of 

the year than 2023.

In 2022, three severe hurricanes struck the 

continental United States and Puerto Rico, causing 

more overall estimated damages than hurricanes 

in the 2021 season. Hurricanes Ian, Nicole, and Fiona 

caused an estimated $117.6 billion in damages, an 

increase of 39 percent from the 2021 season. Estimated 

damages from the 2022 hurricanes were more costly 

than those reported in 2021 because two of the storms 

affected the highly populated and densely developed 

Florida coastline. Hurricane Ian in Florida was the 

most destructive of the 2022 hurricanes with $114 

billion in estimated damages and is estimated to be 

the third-costliest hurricane to hit the mainland United 

States to date. Shortly after Ian, Hurricane Nicole in 

Florida caused an estimated $1 billion in damages. 

Nicole was relatively mild in strength but covered a 

large geographic area, including several areas still 

recovering from Hurricane Ian, compounding the 

existing damage and the recovery timeline in those 

132 More than one dozen public and private sector data sources help capture NOAA’s estimates for the direct costs (both insured and uninsured) of weather 

and climate events. These costs include physical damage to residential, commercial, and municipal buildings; material assets (content) within buildings; time 

element losses such as business interruption or loss of living quarters; damage to vehicles and boats; public assets including roads, bridges, levees; electrical 

infrastructure and offshore energy platforms; agricultural assets including crops, livestock, and commercial timber; and wildfire suppression costs. See NOAA’s 

“Billion Dollar Weather and Climate Disasters FAQ.” 

133 Jim Carlton, “Wildfire Season in U.S. West Ends With Fewer Blazes, Less Damage,” Wall Street Journal, November 17, 2022.

134 Office of Governor Gavin Newsom, “Governor Newsom and Cal Fire Announce the End of Peak Wildfire Season for Most of California,” news release, 

November 17, 2022.

135 The number of wildfires and acres burned during the 2022 western wildfire season were higher than the ten-year average. “Mild” refers to the resulting 

economic impact of these fires, which was considerably lower in 2022 than in the previous two seasons.

areas. Hurricane Fiona in Puerto Rico disrupted power 

to the entire island, severely damaging its power 

grid, which remained in a fragile state after Hurricane 

Maria in 2017 caused the largest blackout in U.S. 

history. Fiona is estimated to have caused $2.6 billion 

in damages and is expected to weigh on the island’s 

ongoing recovery from long-running fiscal issues.

The 2022 wildfire season in the western United 

States caused an estimated $3.2 billion in damages, 

making it less costly than the previous two seasons. 

Wildfires are historically common in the western 

United States, but they have become more severe 

in recent years. The most destructive wildfire of the 

2022 season occurred in northern New Mexico. The 

fire destroyed more than 900 structures and burned 

more than 340,000 acres, making it the largest fire by 

acres burned in New Mexico’s history. The burn scar 

left by the fire contributed to flooding that significantly 

affected residents in the area as well as the entire 

city of Las Vegas, New Mexico. The city’s water supply 

continued to be threatened by debris and ash through 

early 2023 and could take years to fully resolve. The 

three western states highly susceptible to wildfires—

California, Oregon, and Washington—all experienced 

a milder wildfire season. Despite having one of their 

warmest summers on record in 2022, well-timed 

precipitation kept fires from spreading and resulted 

in a lower economic impact.133 California’s wildfire 

season in particular was moderate compared to the 

2021 and 2020 seasons, which rank as two of the most 

severe in the state’s history.134 Although the 2022 

wildfire season was relatively mild compared to the 

past few years, ongoing drought in the West and hotter 

temperatures created conditions favorable for wildfire 

formation.135

Excessive heat in 2022 exacerbated drought 

conditions and reduced agriculture production. 

According to NOAA, 2022 ranked as the third-hottest 

summer on record. Higher temperatures and 

persistent drought conditions affected large portions 
76 | 2023 Risk Review

of the United States. Nearly half (49.6 percent) of the 

continental United States reported some degree of 

drought late last year, the highest percentage since 

the Drought Monitor was established 20 years ago. In 

five states—New Mexico, Texas, Oregon, Nevada, and 

California—the worst drought conditions affected 

almost 30 percent of counties in each state.136 Although 

this is down from nine states with more than 30 

percent of counties in exceptional drought in 2021, 

the combination of drought severity and duration is 

causing increased losses for agricultural producers and 

a shortage of water supplies. For example, in Texas, 

cotton production in 2022 declined 60.3 percent from 

the prior year.137 Further, the 2022 drought reduced the 

number of cattle produced in Texas, across the Central 

Plains, and in the western half of the United States.138

Drought conditions have also reduced water supplies. 

Three successive years of drought in California have 

caused water allocations for agriculture to decline, 

forcing many of the state’s cattle producers to reduce 

their herds, rice producers to cut back on planting, and 

fruit growers to remove whole sections of orchards. 

Some reservoirs in the state reached critically low 

levels last year, but strong precipitation in late 2022 

and early 2023 helped replenish some water levels. 

However, almost none of the storms reached the 

Colorado River basin, which supplies water to several 

western states and remained low at the start of 2023.

While insurance policies may cover some or all 

of the loss associated with many severe climate 

and weather events, policies may become more 

expensive or unavailable. Access to private 

insurance protection to cover losses for a particular 

geographic area or business activity, particularly 

residents and businesses in areas facing increasing 

severity and frequency of severe weather events, 

has begun to evolve and become less accessible.139

In addition, while government support may provide 

assistance with costs associated with many severe 

weather events, it may not always fully cover losses. 

Overreliance on insurance and government support 

136 The areas most affected by drought in 2022 were those with the worst drought conditions—what the U.S. Drought Monitor calls “exceptional”—for at least 12 

weeks in 2022. See https://droughtmonitor.unl.edu/.

137 U.S. Department of Agriculture, Cotton and Wool Outlook, June 2023 Table 10 Cotton Production Compared to June 2022 Table 10 Cotton Production.

138 Elena Bruess, “In Texas Drought, Hay Shortage Hits San Antonio-Area Ranchers,” San Antonio Express News, December 14, 2022.

139 State Farm General Insurance Company, “State Farm General Insurance Company: California New Business Update,” news release, May 26, 2023; California 

Department of Insurance, "Insurance Commissioner Dave Jones Releases Report Addressing Fire Insurance Availability Issues," news release, January 4, 2018; 

and California Department of Insurance, "Wildfire Survivors Now Covered by New Insurance Protections," news release, July 27, 2021. 

140 Gruenberg, “The Financial Risks of Climate Change.”

may therefore present additional risks, as these types 

of assistance may not be able to compensate for losses 

to the same extent as they have in the past, which may 

affect the ability of smaller institutions to mitigate 

climate-related financial risk.

The FDIC is in the early stages of understanding and 

addressing financial risks posed by climate change 

and intends to expand efforts in a thoughtful and 

measured approach that emphasizes collaboration 

with other supervisors and industry. The FDIC is 

working with domestic and international financial 

regulatory counterparts to better understand and 

address climate-related financial risks. The FDIC is 

also working with banking industry stakeholders to 

maintain a meaningful dialogue on climate-related 

risks and to support institutions as they develop plans 

to identify, monitor, and manage these risks.

To enhance the understanding of climate-related 

financial risks, the FDIC in 2022 established an 

internal cross-disciplinary working group to assess 

the safety and soundness and financial stability 

considerations associated with climate-related 

financial risks and to develop broad understanding 

of climate-related financial risk in all of its forms. The 

FDIC is also coordinating with interagency peers and 

is participating on the Financial Stability Oversight 

Council’s Climate-Related Financial Risk Committee. 

Further, as climate change is a global issue, the 

FDIC joined the Network of Central Banks and 

Supervisors for Greening the Financial System to foster 

collaboration and share best practices for addressing 

climate-related financial risk globally.140

The FDIC recognizes that risk management 

practices in this area are evolving and will continue 

to encourage banks to consider climate-related 

financial risk in a manner that allows them to 

prudently meet the financial services needs of 

their communities. As an initial step to promote a 

consistent understanding of effective management 

of this emerging risk, in March 2022 the FDIC issued 
2023 Risk Review | 77

a proposed Statement of Principles for ClimateRelated Financial Risk Management for Large Financial 

Institutions. The principles provide a high-level 

framework for the safe and sound management 

of exposures to climate-related financial risk and 

are intended to support efforts by large financial 

institutions to focus on key aspects of climate-related 

financial risk management.141 The draft principles 

141 Federal Deposit Insurance Corporation, “FDIC Issues Request for Comment on Statement of Principles for Climate-Related Financial Risk Management for 

Large Financial Institutions,” news release, March 30, 2022. 

142 Board of Governors of the Federal Reserve System, “Federal Reserve Board Invites Public Comment on Proposed Principles Providing a High-Level Framework 

for the Safe and Sound Management of Exposures to Climate-Related Financial Risks for Large Banking Organizations,” news release, December 2, 2022. The news 

release states that the Board’s proposed principles are substantially similar to proposals issued by the FDIC and the OCC. 

are substantially similar to the principles issued by 

the Office of the Comptroller of the Currency (OCC) 

in December 2021 and the Federal Reserve Board 

in December 2022.142 After reviewing comments 

received on the proposed principles, the FDIC intends 

to coordinate with the OCC and Federal Reserve in 

issuing any final guidance.
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2023 Risk Review | 79

ADC Acquisition, Development, and Construction

C&I Commercial and Industrial

Call Reports Consolidated Reports of Condition and Income

CLO Collateralized Loan Obligation

CRE Commercial Real Estate

FDIC Federal Deposit Insurance Corporation

FEMA Federal Emergency Management Administration

FHLB Federal Home Loan Bank

FinCEN Financial Crimes Enforcement Network

GDP Gross Domestic Product

KBW Keefe, Bruyette, and Woods (Bank Index)

LCD Leveraged Commentary and Data (S&P)

NASDAQ National Association of Securities Dealers Automated Quotations (Market Index)

NIM Net Interest Margin

PPP Paycheck Protection Program

S&P Standard and Poor’s (S&P 500)

SBA Small Business Administration

USDA U.S. Department of Agriculture

ACRONYMS AND ABBREVIATIONS
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2023 Risk Review | 81

Blockchain A type of distributed ledger technology that is the foundational innovation underlying 

the crypto-asset ecosystem. See also Crypto-Assets.

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.

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. 

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. 

Community Bank FDIC-insured institutions that meet the criteria for community banks that was 

developed for the FDIC Community Banking Study, published in December 2012.  

Thresholds for certain criteria are adjusted upward quarterly and described in 

“Notes to Users” for the FDIC Quarterly Banking Profile.  See, for example: page 35 of 

the FDIC Quarterly Banking Profile, First Quarter 2023. 

Crypto-Assets Private sector digital assets that depend primarily on the use of cryptography and 

distributed ledger or similar technologies. The term encompasses many assets 

commonly referred to as “coins” or “tokens” by market participants. See also 

Stablecoins.

Default Failing to promptly pay interest or principal when due.

Early-Stage Past-Due 

Loans and Leases

Loans and leases 30 to 89 days past due and still accruing interest.

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.

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. The financial crisis, in turn, resulted in the Great 

Recession, the effects of which spread throughout the global economy.

GLOSSARY OF TERMS
82 | 2023 Risk Review

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. 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 nationally recognized statistical rating organizations. 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.

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. 

Net Interest Margin The difference between interest and dividends earned on interest-bearing 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.

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

Noncurrent Loans and 

Leases

The sum of loans and leases 90 days or more past due, and loans and leases in 

nonaccrual status. 

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

members of the Organization of the Petroleum Exporting Countries (OPEC) and ten 

non-OPEC partner countries. 

Problem Banks 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." 

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 in which 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.
2023 Risk Review | 83

Real Gross Domestic 

Product

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.

Rebooked Loans Bank repurchases of delinquent single-family mortgage loans backing mortgagebacked securities that are recorded on the mortgage banking schedule in bank Call 

Reports.

Short-Term Liquid 

Assets 

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

agreements, and securities maturing in less than one year. 

Stablecoins A type of crypto-asset designed to maintain a stable value relative to a national 

currency or other reference asset or assets. 

Total Past-Due Loans 

and Leases

Loans and leases 30 to 89, or 90 days or more past due, and loans and leases in 

nonaccrual status.

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.

Warehouse Lending

Wholesale Funding

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 the manager purchases 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.

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.
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FDIC-015-2023