Section I: Executive Summary 

The banking environment improved in 2021 as the 

U.S. economy recovered from a severe recession in 

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

the pre-pandemic output peak in second quarter. 

However, the recovery was uneven across industries 

and regions. Labor markets improved, but labor-force 

participation rates remained weak and signs of labor 

shortages emerged in key industries. Global supply 

chain disruptions contributed to substantially higher 

inflation, pressuring consumer budgets and business 

costs. Economic growth slowed during the second half 

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

programs that supported consumers and businesses. 

Most baseline forecasts call for a modest deceleration 

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

higher inflation and increased geopolitical uncertainty 

following Russia’s invasion of Ukraine. 

Financial market conditions were generally 

supportive of the economy and banking industry in 

2021. Corporate credit conditions remained favorable 

and corporate debt issuance remained strong amid 

low interest rates. Issuance of high-yield bonds and 

leveraged loans reached record highs. Equity markets 

rose and Treasury yields edged higher on economic and 

monetary policy developments. But financial market 

conditions deteriorated in early 2022 when tensions 

between Russia and Ukraine intensified. 

Banking sector profitability increased in 2021 as 

expenses declined and noninterest income rose. 

Banks reported substantially higher net income in 2021 

primarily due to lower credit loss provisions. Net interest 

income for the industry improved in the second half of 

2021 but remained below the 2020 level. Asset growth 

was concentrated in cash, interest-bearing balances, and 

securities, while loan growth remained weak. Stronger 

economic conditions helped support the improvement 

in asset quality during the year. Among community 

banks, net income rose and surpassed the pre-pandemic 

level in 2021, even as net interest income declined. 

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Key Risks to Banks 

Credit Risks: Credit conditions improved in 2021, 

helped by various government support programs 

for businesses and consumers, improving economic 

conditions, and supportive financial market 

conditions. 

• Agriculture: The agricultural sector had a strong 

year in 2021. The sector benefited from higher 

commodity prices, farm incomes, and farmland 

values that helped support agricultural loans 

held by the banking industry, particularly farm 

banks. Farm banks are defined as community 

banks with substantial exposure to the agricultural 

sector. Profitability of farm banks remained 

favorable despite weak loan demand and margin 

compression. Asset quality among farm banks 

improved in 2021, as loan repayments increased 

and loan extensions declined. Despite the current 

strength, rising production costs and supply chain 

problems that affect the agriculture sector may 

pose challenges to the banking sector in 2022. The 

conflict between Russia and Ukraine has created 

uncertainty about the prospects for exports of key 

agricultural commodities. 

• Commercial Real Estate: The commercial real 

estate (CRE) sector was generally resilient to 

pandemic developments during the year, and most 

property types rebounded from the initial setback 

in 2020. Industrial and multifamily properties 

performed relatively well, while office and some 

lodging and retail subtypes continued to struggle. 

The banking industry reported record high CRE 

loans in fourth quarter 2021, and community 

banks remain heavily involved in lending to this 

industry. While CRE asset quality remained strong, 

expiration of pandemic-related financial assistance 

and shifts in the market demand for CRE properties 

may affect future performance. 

• Consumer Debt: Consumer incomes and balance 

sheets remained strong during the year and 

supported consumer lending. Pandemic-related 

fiscal support programs boosted personal income 

in 2021 and lowered household debt burdens. 

Bank consumer loan balances grew in 2021, led 

by auto loans and other non-credit card consumer 

loans. Asset quality across all consumer loan 

categories improved. Community banks reported 

lower noncurrent rates than noncommunity 

banks for auto loans and credit card loans and 

higher noncurrent rates for other non-credit card 

consumer loans. Despite general improvements 

in 2021, consumer loans remain sensitive to 

pandemic developments and could be a source of 

risk for the banking industry. 

• Energy: The energy market rebounded in 2021, 

supporting energy lending conditions. Strong 

global oil consumption and limited production 

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

oil production was slow to return to pre-pandemic 

levels. The recovery of mining employment in 

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

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

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

declined in 2021, as the energy market relied 

more on corporate debt markets for funding. 

Although community banks have limited direct 

exposure to O&G firms, community banks that 

operate in energy-concentrated markets are 

exposed indirectly through their lending to 

consumers and businesses that rely on the energy 

sector. Increased geopolitical uncertainty has 

contributed to higher energy prices in early 2022. 

Russia’s invasion into Ukraine raises prospects 

for a significant global energy supply shock and 

increased market volatility. The conflict could also 

reshape energy policy and planning. 

• Housing: The housing market continued to 

strengthen during the year, supporting mortgage 

lending. Home price growth set a new record in 

2021 driven by strong demand, limited inventory 

of homes for sale, and low mortgage rates. 

Asset quality among bank residential mortgage 

portfolios improved, helped by continued 

government support and forbearance programs. 

Banks reported lower mortgage delinquency 
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rates, with community banks reporting lower 

delinquency rates than noncommunity banks. 

Mortgage lending by nonbank financial institutions 

continued to grow and outpaced bank lending. 

While housing market conditions were favorable 

in 2021 and supported mortgage asset quality, 

headwinds including increased mortgage rates 

from near-record lows may challenge the sector’s 

momentum. 

• Leveraged Lending and Corporate Debt: 

Corporate debt market conditions remained 

relatively stable in 2021 and corporate debt levels 

continued to grow. Banking sector exposure to 

the corporate debt market is generally through 

holdings of corporate debt and collateralized loan 

obligations, lines of credit to corporations, and 

participation in the arranging of leveraged loans 

and corporate bonds. Banks remain vulnerable to 

potential distress in the corporate debt markets, 

particularly if interest rates rise and challenge 

the financial conditions of highly leveraged 

corporations. While community banks generally 

have limited direct exposure to the corporate debt 

market, the banking industry remains vulnerable 

to adverse corporate debt market developments. 

• Nonbank Lending: Bank lending to nonbank 

financial institutions reached a record high in 

2021. Nonbank lending activity is concentrated 

in the largest banks; community banks have 

limited exposure. While the risks of bank lending 

to nonbank financial institutions is relatively 

moderate, lending to nonbank institutions exposes 

banks to broader risks from the financial system. 

• Small Business Lending: Small business 

conditions improved during the year, helped by 

improving economic conditions, a rebound in 

consumer spending, and continued government 

support, particularly the Paycheck Protection 

Program (PPP). Small business loans remained 

a large share of the community bank loan 

portfolio, and community banks remained 

active participants in the PPP program in 2021. 

However, aggregate small business loan growth 

declined in 2021 when the PPP ended in the 

second half of the year. Excluding PPP loans, small 

business commercial and industrial lending grew, 

especially among community banks. Despite 

the improvements in small business conditions, 

small businesses remain vulnerable to pandemic 

developments that may threaten asset quality. 

Market Risks: Market risks remain moderate overall. 

Low interest rates continue to challenge net interest 

margins and banking sector profitability. Liquidity 

levels in the banking industry remained strong and 

were supported by historically high levels of deposits 

and bank reserves. 

• Interest Rate Risk and Net Interest Margins: Low 

interest rates and excess liquidity continued to 

reduce bank net interest margins (NIMs), which fell 

to a record low in 2021. Banks sought to increase 

interest income by holding more long-term 

securities. Community banks invested in longer 

maturing assets with higher yields, which helped 

bolster NIMs compared to noncommunity banks. 

While higher interest rates could benefit banking 

industry interest income, they could be a source of 

risk for banks with substantial exposure to longerterm assets. 

• Liquidity and Deposits: In 2021, banking sector 

deposits, including deposits held by community 

banks, reached the highest level since data 

collection began in 1984. The growth in deposits 

resulted in high levels of cash on bank balance 

sheets while lending growth remained slow, 

contributing to higher levels of liquid assets. As 

liquid assets grew, banks reduced their reliance on 

wholesale funding. These conditions will continue 

to support bank balance sheets as the banking 

industry and economy recover from the pandemic. 

Operational Risks: Operational risks, including 

cybersecurity risks and risks related to illicit financial 

activity, remain elevated for the banking sector. 

• The number of ransomware attacks in the 

banking industry increased in 2021, and banks 

continued to discover vulnerabilities to their 

software and computer networks. The number and 
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sophistication of cyber attacks also increased with 

remote work and greater use of digital banking 

tools. Moreover, threats from illicit activities 

continue to pose risk management challenges to 

banks. 

Climate-Related Financial Risk: The effects of climate 

change present emerging risks to the banking 

industry. 

• Climate-related financial risks include physical 

risks from harm to people and property and 

transition risks from the shifts in policy, sentiment, 

and technology associated with a transition toward 

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

the third most-costly year since 1980. Two 

hurricanes, several wildfires, and a serious drought 

affected many local communities and the banks 

that operate there. Severe climate-related events 

can disrupt local economic conditions and present 

risk across the banking industry, regardless of an 

institution’s size, complexity, or business model. 

This discussion of climate-related financial risks 

focuses only on physical risks to communities and 

banks from severe climate-related events in 2021, 

as transition risk is a longer-term, prospective 

risk that is beyond the scope of this retrospective 

review.