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.