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.