2019 Risk Review | 17

As of first quarter 2019, there were 1,315 farm banks representing nearly one-quarter of all 

FDIC-insured institutions. During first quarter 2019, agriculture loans held by FDIC-insured 

institutions totaled $184 billion. 

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

• Eight percent of all banks and 31 percent of farm banks hold a concentration of agriculture loans 

above 300 percent of total capital.

• Exposure to agriculture lending is concentrated in the Midwest. 

Section III: Key Bank Risk Issues

Agriculture

• The agricultural economy is now in its sixth year of low commodity prices and farm incomes, and 

agricultural exports are under pressure from trade uncertainties and slowing global growth.

• Strong farmland equity has enabled farmers to restructure loans to manage operating losses and 

replenish working capital, keeping reported credit problems low at insured institutions. 

• Farm bank asset quality and liquidity measures are lower in 2018 than recent years but remain stronger 

than the levels reported during the 1980s farm bank crisis. 

Regional Exposure to Agriculture Lending

Dots on map represent banks with total agriculture loans above 300 percent of total capital.

Source: FDIC
18 | 2019 Risk Review

The agricultural sector struggles amid low commodity 

prices that continue to depress farm profitability. The 

farm economy has faced low commodity prices since 

farm income peaked in 2013. Net farm income, a 

broad measure of profits, is forecast to increase 10 

percent in 2019 but remain below the 25-year average 

(Chart 8). Lower prices for soybeans, corn, pork, and 

dairy products have been the primary contributors 

to reduced farm income during the past six years. 

According to the United States Department of 

Agriculture’s (USDA) long-term forecast, real agricultural 

commodity prices will continue to decline over the next 

ten years as global production outstrips demand. 

Map 2

Soybean Production Is Heavily Concentrated in the Midwest

Dots on map represent farm banks as of December 31, 2018.

<250,000

250,000-749,999

750,000-1,999,999

2,000,000-3,999,999

4,000,000-7,999,999

8,000,000+

Bushels

0

20

40

60

80

100

120

140

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F

Net Farm Income, Billions of Real U.S. Dollars

Source: U.S. Department of Agriculture (USDA).

Notes: Dollar values are adjusted for ination. 2018 and 2019 gures are USDA forecasts (F). 

The average is calculated for the 25 years ending in 2017.

Chart 8

Net Farm Income Is Expected to Remain Below the Historical

Average in 2019 

25-Year Average

Source: U.S. Department of Agriculture
2019 Risk Review | 19

U.S. agricultural exports are facing increased 

pressure because of trade uncertainty, weakening 

global demand, and a strengthening dollar. In 2018, 

China imposed tariffs on several U.S. agricultural 

products, the most significant being a 25 percent 

tariff on U.S. soybeans. More than one-quarter of 

the U.S. soybean crop is exported to China annually. 

Recent tariffs are negatively affecting price and trade 

volumes, which could translate to stress for lenders 

in areas that rely on soybean production, primarily 

Midwest states (Map 2). After Chinese soybean 

tariffs went into effect in July 2018, U.S. soybean 

prices dropped more than 5 percent through yearend. Through the first seven months of the 2018 

to 2019 marketing year (September 2018 through 

March 2019), U.S. agriculture export volume to China 

was down 82 percent compared with the prior threeyear marketing average. U.S. soybean growers have 

found relief in greater exports to other countries 

and financial aid payments from USDA’s Market 

Facilitation Program, but global exports remain a 

concern for farmers and lenders. In addition, the 

appreciating dollar has made U.S. agricultural goods 

more expensive relative to competitors, which may 

put additional downward pressure on agricultural 

export volume and incomes in the near term. 

Strong farmland equity has enabled farmers to 

restructure loans to manage operating losses and 

replenish working capital, keeping reported credit 

problems low at FDIC-insured institutions. Farmland 

values typically account for about 80 percent of total 

farm assets, making the stability of these values 

important to agricultural producers and their lenders. 

Inflation-adjusted farm real estate values in the 

United States nearly doubled between 2004 and 

2014, a pace not seen since the farming boom of the 

1970s. Despite the ongoing downturn in farm profits, 

farmland values have been resilient, remaining at or 

near 2014 peak levels through 2019. The stability in 

farmland values has been mainly due to low interest 

rates, low supply of farmland on the market, and 

ongoing demand for farmland. 

Farmland equity is being used to restructure 

agriculture loans to prevent operating losses from 

translating to credit losses at farm banks. 

According to USDA, the forecasted industry average 

debt-to-equity ratio for 2019 is 16.1 percent, well 

below the 28.5 percent during the height of the 

1980s farm crisis. However, if the downturn and 

unprofitability persist, equity could continue to 

dissolve and highly leveraged producers may exit 

the industry. 

Asset quality and liquidity measures at farm banks 

are weakening. The median first-quarter past-due and 

nonaccrual (PDNA) agricultural loan ratio among farm 

banks increased from a low 0.13 percent at the peak 

of the industry’s strength in 2013 to 0.77 percent 

in 2019, but remains well below the high of 5.92 

percent reported in 1986. The increase at the 90th 

percentile tail of the PDNA agricultural loan ratio was 

more pronounced, nearly doubling from 2.85 percent 

in 2013 to 5.56 percent in 2019. The first-quarter 

agricultural loan charge-off rate also increased 

modestly at the tail, with the 95th percentile chargeoff rate increasing from 0.01 percent in 2013 to 

0.23 percent in 2019. Consistent with these trends, 

examiners noted a modest decline in the quality 

of agriculture loan credits at farm banks in 2018. 

Despite the current stresses, agriculture PDNA levels 

remain far below those reported during the 1980s 

farm crisis.

Farm bank liquidity has declined and funding is under 

pressure because of strong loan demand. The need 

for financing has increased because of declining net 

farm income, rising operational costs, and dwindling 

working capital, turning many farm customers from net 

depositors in past years to net borrowers in recent 

years. Loan growth at farm banks has outpaced 

deposit and asset growth since the downturn in 

the farm economy began. As a result, farm banks 

continue to meet agricultural credit demand at the 

expense of balance sheet liquidity. The median ratio 

of short-term liquid assets to total assets at farm 

banks was a record first-quarter low of 20 percent in 

2019. Moreover, weak deposit growth has resulted in 

a growing reliance on wholesale funding that may not 

be available if bank conditions deteriorate.
20 | 2019 Risk Review

Commercial Real Estate

• Commercial real estate (CRE) market conditions remain favorable as the economic cycle matures.

• Modest oversupply concerns are emerging for multifamily and industrial CRE property types, while retail 

CRE is facing long-term challenges related to shifts in consumer shopping behavior.

• FDIC-insured institutions have grown their CRE loan portfolios, primarily with loans for existing properties 

rather than loans for construction and development projects.

• CRE loan performance metrics at FDIC-insured institutions are strong, although institutions with CRE 

concentrations may be vulnerable to economic changes. Competition for quality CRE loans poses 

challenges for institutions operating in the CRE sector. 

During first quarter 2019, CRE loans held by FDIC-insured institutions totaled $2.4 trillion. 

• Community banks hold 30 percent ($717 billion) of total CRE loans. 

• Twenty-six percent of all banks hold a concentration of CRE loans above 300 percent 

of total capital. 

• Exposure to CRE lending is concentrated in the West, Southeast, and Northeast. 

Regional Exposure to Commercial Real Estate Lending

Dots on map represent banks with commercial real estate loans above 300 percent of total capital.

Map 3

The Midwest and Northeast Have Highest Share of Banks Reporting NIM Compression

Source: FDIC
2019 Risk Review | 21

CRE conditions remain favorable as the economic 

cycle matures. Similar to the aggregate economy, the 

CRE market has enjoyed a period of expansion in 

recent years. However, several indicators suggest that 

CRE market conditions have peaked and are entering 

a period of moderation. 

Each of the four major CRE property types—

multifamily, office, retail, and industrial—have 

benefited from economic growth. Vacancy rates 

and capitalization rates remain low, while rents and 

property prices continue to grow (Chart 9). This 

relative balance of conditions accounts for a positive, 

but guarded, view of CRE overall. None of the four 

property types shows signs of distress, yet each 

faces strains that may be exacerbated by slower 

economic growth. Multifamily and industrial properties 

face overbuilding concerns. Certain retail properties, 

particularly older strip malls, are struggling with 

historical oversupply and changes in the ways 

customers shop.18

18Commercial real estate data are from CoStar, unless otherwise noted.

Modest oversupply concerns are emerging for 

multifamily and industrial property types, while 

retail faces long-term challenges related to shifts in 

consumer shopping behavior. Multifamily construction 

has been robust and may outpace demand in some 

markets. Apartment demand has outpaced supply 

for much of this cycle, following the housing market 

downturn during the last recession. While supply 

and demand conditions seem to be balanced at the 

national level, continued construction activity could 

lead to supply and demand imbalances in certain 

markets if the cycle slows. Several geographies have 

had outsized supply growth along with high and rising 

vacancy rates for a year or more. Primarily located 

in the Southeast and Southwest, these apartment 

markets could soften considerably if job growth slows 

or if interest rates rise abruptly. 

0

2

4

6

8

10

12

14

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

Chart 9

Vacancy Rates Remain Low

Multifamily

Source: CoStar

Note: Quarterly data through rst quarter 2019.

Ofce

Retail

Industrial

Vacancy Rate, Percent
22 | 2019 Risk Review

Industrial property construction also has been 

strong but is less likely to outpace demand. Similar 

to the multifamily segment, supply concerns are 

emerging within the industrial segment in certain 

geographies. Supply growth has surged, particularly 

in markets located along key transportation and 

shipping corridors. At the same time, the evolution of 

online shopping has boosted demand for warehouse 

space and facilities that serve “last-mile” delivery. 

Consequently, supply growth is far more widespread 

geographically than in the multifamily sector, and 

demand is keeping pace in most markets. Still, some 

Midwest and Northeast markets have seen large 

volumes of new construction and have additional 

growth in the construction pipeline. If economic 

conditions slow and demand weakens, these projects 

could become troubled.

Retail faces long-term challenges and is the weakest 

of the four major property types. The retail sector is 

still contending with historical oversupply that is now 

being exacerbated by shifting consumer preferences. 

Fewer customer visits to traditional brick-and-mortar 

stores have contributed to declining sales, which is 

driving the high volume of store closures. The most 

vulnerable retail markets are smaller markets in the 

Southeast and Southwest.

CRE lending at FDIC-insured institutions continues to 

grow, but it may be less vulnerable than in the last 

cycle because of the focus on existing properties 

rather than new construction. As of first quarter 2019, 

FDIC-insured institutions held almost $2.4 trillion in 

CRE loans, with year-over-year increases reported for 

the past 26 quarters (Chart 10). Although these 

trends have continued into 2019, growth is slowing 

and most of these loans are secured by existing CRE 

properties rather than the historically more risky ADC 

segment of CRE loans. As of first quarter 2019, ADC 

loans made up only 15 percent of CRE loans, 

compared with nearly 34 percent in first quarter 

2007. In addition, CRE is widely held across the 

banking industry. CRE loans make up at least onequarter of the loan book at more than 60 percent of 

both community and noncommunity banks. In 

contrast, ADC loans make up at least one-quarter of 

the loan book at less than 1 percent of both 

community and noncommunity banks.

In aggregate, CRE lending at FDIC-insured institutions 

increased during the past decade. However, the ratio 

of CRE loans to capital is lower today than at the 

height of the last cycle. The national median ratio of 

CRE loans to total capital was 186 percent in first 

quarter 2019, compared with a high of 216 percent 

in fourth quarter 2008. Similarly, as of early 2019, a 

smaller share of institutions had high concentrations 

of CRE loans compared with 2008. In first quarter 

2019, 1,406 institutions, or 26 percent, reported a 

CRE concentration of 300 percent or more of total 

capital, down from 36 percent in fourth quarter 2008. 

Still, nearly one-third of noncommunity banks and 

more than one-quarter of community banks held CRE 

concentrations of 300 percent or more.

0

500

1,000

1,500

2,000

2,500

3,000

2007 2009 2011 2013 2015 2017 2019

Unsecured CRE

Multifamily

Total Nonfarm

Nonresidential

Acquisition,

Development, &

Construction

Chart 10

CRE Lending at FDIC-Insured Institutions Continues to Grow

Source: FDIC

Note: Data as of rst quarter of each year.

Billions of Dollars
2019 Risk Review | 23

The CRE sector and institutions with concentrations 

in loans to the CRE sector have been vulnerable to 

changes in the economic cycle. Findings from the 

2012 FDIC Community Banking Study show that 

community banks specializing in CRE lending failed 

more than twice as often as the average community 

bank.19 Leading up to the financial crisis, many 

community banks exhibited a higher risk appetite and 

many failed or experienced a ratings downgrade. High 

construction loan concentrations and rapid asset 

growth proved damaging when coupled with weak risk 

management practices and inadequate capital levels. 

Competition for quality CRE loans poses challenges for 

institutions operating in the CRE sector. In aggregate, 

banks have been regaining market share of CRE 

loans outstanding after a decline during the financial 

crisis. However, competition for quality CRE loans 

can pressure institutions to ease terms, loosen 

underwriting standards, or make policy exceptions. 

Examiners report that the majority of CRE-focused 

lenders have stable CRE risk profiles and are in 

satisfactory condition. Nonetheless, since mid-2017, 

examiners have noted opportunities for CRE risk 

19FDIC Community Banking Study, December 2012, 5–13, https://www.fdic.gov/regulations/resources/cbi/report/cbi-full.pdf. The study covers the 

period from 1984 to 2011.

management improvement, most commonly in the 

areas of board and management oversight, portfolio 

sensitivity analysis, portfolio management, and, to a 

lesser degree, loan underwriting. 

Despite competitive pressure, CRE loan performance 

metrics at FDIC-insured institutions remain strong. 

Total past-due and nonaccrual CRE loans are at their 

lowest levels in nearly a decade after declining 

year-over-year for nine consecutive years. The median 

delinquency rate for CRE loans among all U.S. 

institutions fell to 0.51 percent in first quarter 2019, 

well below the levels leading into the last recession. 

All regions of the United States had median CRE 

past-due and nonaccrual rates below 1 percent as of 

first quarter 2019. Banks in the Southeast continue 

to report the highest median CRE delinquency rate 

(0.67 percent in first quarter 2019), but the rate 

remains well below the area’s recent high of 6.80 

percent in 2011.
24 | 2019 Risk Review

Energy 

• Oil and gas supply and demand fundamentals, as well as macroeconomic and geopolitical factors, are 

contributing to energy market volatility.

• Banks with energy sector exposures continue to be resilient into 2019 despite oil price declines.

• High-yield debt linked to the energy sector continues to grow and could be vulnerable in another 

industry downturn. 

Domestic oil production reached a record high in late 

2018, and economic growth in oil-reliant economies 

is strong. However, the oil industry remains vulnerable 

to volatility that produced past boom and bust cycles. 

Oil prices declined more than 40 percent in less than 

three months in late 2018, following record production 

and concerns about slowing global economic growth. 

While this price decline did not result in a widespread 

slowdown of the national economy, economic growth 

in oil-reliant states decelerated. 

Eight states—Alaska, Colorado, Louisiana, New 

Mexico, North Dakota, Oklahoma, Texas, and 

Wyoming—accounted for more than three-fourths 

of the nation’s oil output in December 2018. The oil 

economy is closely tied to these state economies, 

directly and indirectly. In 2018, job growth in the oil 

states outpaced job growth in other states but 

slowed markedly in the second half of the year 

as oil prices declined (Chart 11). This slowdown 

was less severe than the one in 2014 and 2015 

when oil prices also fell. Because oil supply and 

demand fundamentals are affected by many 

different variables—including technical, political, 

macroeconomic, and geopolitical—the probability of 

continued volatility in this industry remains high, and 

the impact on oil-concentrated states will likely persist. 

0

20

40

60

80

100

120

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2013 2014 2015 2016 2017 2018 2019

West Texas Intermediate Crude

Oil States

All Other States

Sources: Bureau of Labor Statistics and U.S. Energy Information Administration

Notes: Oil states include Alaska, Colorado, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, and

Wyoming. Quarterly data through rst quarter 2019.

Employment Growth, Year-Over-Year Percent Change West Texas Intermediate Crude, Dollars Per Barrel

Chart 11

Oil Prices Are an Important Economic Driver for Oil-Producing States

Economic exposure to the energy sector is concentrated in eight states with oil-reliant economies: Alaska, 

Colorado, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, and Wyoming. 

• Direct bank loans to the energy sector are primarily held at a small number of large and 

regional banks.

• Exposure to the energy sector is focused in the South.
2019 Risk Review | 25

Banks in oil-concentrated areas remain resilient to oil 

price volatility. Examination findings show that only 

a handful of FDIC-supervised banks, concentrated 

in the FDIC’s Dallas Region, have more than 25 

percent of loans tied directly to oil and gas lending.20

Oil exploration and production (E&P) operations 

today are more capital intensive and beyond the 

lending capacity of many community banks. Credit 

deterioration resulting from low oil prices has been 

relatively mild. At first quarter 2019, the past-due loan 

rate for oil-reliant states was 1.4 percent, only slightly 

above the 1.2 percent rate for all other states 

(Chart 12). Few banks in oil- and gas-concentrated 

areas exhibited severe stress, and no bank failures 

occurred in the concentrated areas during the recent 

period of low oil prices.21

20 Lisa A. Garcia and Kenneth A. Weber, “Oil Price Volatility and Bank Performance: A View from the Supervisory Process,” FDIC Supervisory Insights 15, 

no.1 (Summer 2018): 3–14.

21Ibid.

22Loans that are special mention and classified are considered non-pass loans. See “Shared National Credits Program 2015 Review,” November 2015.

23“Shared National Credits Program 2015 Review, 3rd Quarter 2016 / 1st Quarter 2017 Examinations,” August 2017.

Credit deterioration was pronounced in oil and gas 

loan portfolios at larger banks following the price 

declines of 2014 and 2015, but it has since 

moderated. In 2014, Shared National Credit (SNC) 

reviews reported that $6.9 billion of oil and gas 

credits were classified, an amount that represented 

3.6 percent of total SNC classified loans.22 The 

volume peaked in 2016 at $77 billion. Minor 

improvement was reported in 2017, but problem oil 

and gas credits still accounted for 26.5 percent of all 

SNC classifications that year.23 In 2018, conditions in 

the energy sector had improved enough that oil and 

gas credits were not reported in the SNC reviews.

1.3

1.4

0

20

40

60

80

100

120

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Oil Price

All Other States

Oil States

Past-Due Loans, Median Percent

Chart 12

Community Banks in Oil-Concentrated States Proved Highly Resilient

to the Rapid and Severe Decline in Oil Prices

West Texas Intermediate Crude, Dollars Per Barrel

Sources: FDIC and Energy Information Administration

Notes: Includes all community banks, as dened by the December 2012 FDIC Community Bank Study.

Oil states include Alaska, Colorado, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, and 

Wyoming. Quarterly data through rst quarter 2019.
26 | 2019 Risk Review

Low oil prices have had a substantial effect on 

high-yield energy debt markets. The evolution of E&P 

financing helps explain why banks have less direct 

credit exposure and a smaller share of the E&P debt 

market. For the past several years, the energy industry 

recorded the largest share of high-yield debt, and that 

share continues to grow. According to Fitch Ratings, 

the energy sector accounted for less than 6 percent 

of the issued high-yield debt in 2000. By 2018, the 

energy sector accounted for 15.5 percent of highyield debt. The default rate for high-yield energy debt 

declined in 2018 to 2.4 percent, significantly below 

the 2016 peak of 18.8 percent and below the 2001 

to 2018 annual average of 4.0 percent. 

Prospects for E&P firms improved in 2019, but oil 

market volatility remains a risk. Firms continued 

to achieve lower break-even prices, as production 

efficiencies increased and firms’ financial 

performance improved. Many E&P firms expanded 

operations in 2018 and funded increased capital 

expenditures with debt issuance and C&I loans. 

C&I lending, which was the fastest-growing portfolio 

segment for banks in top oil-producing states in 

2018, sustained that pace in first quarter 2019, 

likely due to overall economic growth and demand for 

business loans linked to the oil and gas sector. 
2019 Risk Review | 27

Housing

• Signs of a slowdown in sales are emerging in the housing market even as house prices continue to rise 

across most of the nation.

• Affordability is a growing concern as income growth lags the rise in house prices and mortgage payments. 

• Among FDIC-insured institutions, the condition of the residential mortgage portfolio is favorable, but some 

banks report significant loan concentration levels and increased competition. 

During first quarter 2019, 1–4 family residential loans held by FDIC-insured institutions 

totaled $2.1 trillion.

• Community banks hold 19 percent ($399 billion) of total 1−4 family residential loans. 

• Twelve percent of all banks hold a concentration of 1–4 family loans above 

300 percent of total capital. 

• Exposure to 1–4 family residential lending is concentrated in New England. 

Regional Exposure to 1-4 Family Residential Real Estate Lending

Dots on map represent banks with 1-4 family residential real estate loans above 300 percent of total capital.

Source: FDIC
28 | 2019 Risk Review

Signs of a slowdown are emerging in the housing 

market. As the broader economy recovered from 

the Great Recession, forward-looking measures of 

housing market activity, including home sales and 

new residential construction, slowly recovered. At 

the same time, house prices increased sharply from 

cyclical lows. Housing market activity lost momentum 

in 2018 as low inventory and higher mortgage rates 

reduced the pace of growth. Lenders reported weaker 

demand for residential mortgages. Nationally, home 

sales in 2018 declined from a year earlier and were 

well below the cyclical high as of first quarter 2019 

(Chart 13). A weak existing home sales market was 

primarily responsible for the lower sales volume, but 

sales of new residential construction also slowed. 

The confluence of these factors led to a decline in 

home builder confidence, reflecting concerns about 

the softening sales environment. 

Several factors contributed to the decline in home 

sales during 2018. Housing demand slowed as 

prices increased and houses became less affordable. 

Rising mortgage rates in 2018 also contributed 

to a slower pace of home sales. Federal tax law 

changes limiting housing-related tax deductions that 

went into effect in 2018 also may have contributed 

to slower home sales, particularly in regions with 

higher property values and higher property taxes.24

24 Richard Peach and Casey McQuillan, “Is the Recent Tax Reform Playing a Role in the Decline of Home Sales?,” Federal Reserve Bank of New York, 

April 15, 2019.

In addition, the historically low supply of homes 

available for sale restrained sales volumes.

Deteriorating housing affordability is a risk for the 

housing market. As the housing market recovered 

from the Great Recession, house price appreciation 

exceeded income growth. Lower mortgage rates 

during much of the current cycle mitigated some of 

the disparity between home price and homebuyer 

income growth. However, rising mortgage rates 

weighed on affordability until the recent mortgage rate 

retreat. 

Affordability is a particular concern in markets where 

home prices are high or have risen more quickly than 

income levels. As of fourth quarter 2018, singlefamily residential properties in California and Hawaii 

were the least affordable in the nation (Chart 14). At 

the local level, the least affordable metro areas are 

also primarily located in these two states, with the 

San Francisco Bay Area having the least affordable 

homes in the nation. While home affordability levels 

in these metros have generally not reached the 

extremes of the previous housing boom, they have 

trended well below long-term median levels. A similar 

trend has occurred in many other metros across the 

country. As affordability levels continue to deteriorate, 

demand for housing may slow.

3.5

4.0

4.5

5.0

5.5

6.0

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

Source: National Association of Realtors (Haver Analytics)

Notes: Quarterly data through rst quarter 2019. Recessions shaded.

Sales of Existing Houses, Millions of Units (seasonally adjusted annual rate)

Chart 13

Home Sales Have Fallen
2019 Risk Review | 29

Community banks report improved loan performance 

in residential mortgage loan portfolios, but these 

institutions face increasing competition. Since 

peaking in 2010 at nearly 3 percent, the median 

total past-due residential mortgage loan rate among 

all community banks declined to 1.26 percent in 

first quarter 2019. A similar trend has been evident 

across regions. By first quarter 2019, median 

residential mortgage past-due rates had declined 

noticeably and ranged from 0.26 percent in San 

Francisco to 1.60 percent in Atlanta.

In first quarter 2019, community banks reported 

a median residential mortgage loan growth rate 

of 2.85 percent. This figure has been relatively 

unchanged over the past several quarters but is 

down considerably from the 9 percent peak in 2008. 

Residential lending tends to be more robust in metro 

areas. Community banks headquartered in a metro 

area reported residential loan growth of 3.4 percent 

in first quarter 2019. This rate compares to 

2.4 percent for banks in a non-metro area. On 

a regional basis, residential loan growth among 

community banks was fastest in the New York, 

Atlanta, and Dallas Regions in first quarter 2019.

25The Senior Loan Officer Opinion Survey on Bank Lending Practices is conducted by the Board of Governors of the Federal Reserve System. The current 

reporting panel consists of up to 80 large domestically chartered commercial banks and up to 24 large U.S. branches and agencies of foreign banks. See 

https://www.federalreserve.gov/data/sloos/about.htm for more information on the April 30, 2019, survey.

Banks face competitive pressures from nonbanks as 

nonbank residential mortgage originators continue 

to gain significant market share. Such competitive 

pressures could shift risks within the financial industry 

and cause the overall level of risk to increase.

Banks generally maintain more conservative 

residential mortgage underwriting practices relative 

to nonbanks, in large part because of compositional 

differences. For example, FDIC analysis of Home 

Mortgage Disclosure Act data shows that banks 

(primarily the largest banks) significantly reduced 

Federal Housing Administration (FHA) lending in the 

post-crisis period, and nonbanks have filled the gap. 

FHA loans typically have higher loan-to-value ratios, 

and FHA borrowers typically exhibit lower credit scores 

and higher debt-to-income ratios relative to borrowers 

seeking conventional conforming or jumbo mortgages. 

Competition from nonbanks and the slowing 

conditions in the housing market could induce banks 

to ease historically tight underwriting standards for 

residential mortgage loans as they reach for growth 

in their lending portfolios. According to the Federal 

Reserve Senior Loan Officer Opinion Survey on 

Bank Lending Practices, the share of respondents 

that reported easing in underwriting standards for 

residential real estate lending rose in late 2018.25

0

20

40

60

80

100

120

140

160

180

Nation WA OR CO CA HI

2007 Q1 (Previous National Home Price Peak)

2018 Q4

Sources: National Association of Realtors, Census Bureau, Bureau of Economic Analysis, and Moody’s Analytics

Notes: Data as of fourth quarter 2018. National number is aggregate of states by Moody’s.

Housing Affordability Index (Below 100 = Unaffordable)

Chart 14

Housing Affordability Remains Above Pre-Recession Levels, Despite Recent Declines

Least Affordable States

More Affordable
30 | 2019 Risk Review

In addition, as signs of a housing market slowdown 

are emerging, a sizable share of banks surveyed 

reported weaker demand for residential mortgages 

through early 2019. According to the FDIC Credit and 

Consumer Products/Services Survey, which includes 

mostly small FDIC-supervised banks, examiners 

report that residential mortgage loan underwriting 

practices for most banks are average, while the level 

of risk for the loan product remains low.26

Residential mortgage loan concentrations have 

declined from post-crisis peaks but remain elevated 

in some areas of the country, particularly in New 

England, which is in the FDIC’s New York Region 

(Chart 15). New England traditionally has had a large 

number of mutual savings banks that focus on 

residential mortgage lending, and these institutions 

fared well during the financial crisis. The nation’s 

community banks reported median residential 

mortgage loan concentrations of 144 percent of total 

26The Credit and Consumer Products/Services Survey is completed by FDIC risk management examiners at the conclusion of each risk management 

examination. The survey is a valuable tool to identify and track emerging products and services, and to identify potential risks. Information referenced in this 

report is from surveys completed as of December 31, 2018.

capital in first quarter 2019. This figure is relatively 

unchanged from one year earlier but is down from the 

post-crisis peak of 169 percent in fourth quarter 

2009. Fourteen percent of community banks reported 

residential mortgage loan concentrations above 300 

percent of total capital in first quarter 2019. 

A majority (62 percent) of community banks with 

significant concentration levels above 300 percent 

are headquartered in metro areas, consistent with 

loan growth trends. 

Exposure to the residential mortgage market is 

highest among banks headquartered in New England. 

In this area, the concentration of mortgage loans to 

total capital was 358 percent in first quarter 2019, 

down from 429 percent during the crisis in 2008 but 

well above all other areas of the country. Sixty-five 

percent of all community banks in New England report 

a concentration level above 300 percent of total 

capital, also the highest among all regions. 

71

103

131

144

164 170

270

0

50

100

150

200

250

300

350

San

Francisco

Kansas

City

Dallas Nation Atlanta Chicago New York

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: FDIC 

Note: First quarter data each year for community banks only. 

Chart 15

Residential Mortgage Loan Concentrations Are Below Post-Crisis Peaks but

Remain Elevated Among Community Banks in Some Regions

Median Residential Loans to Capital, Percent
2019 Risk Review | 31

Leveraged Lending and Corporate Debt

• Total nonfinancial corporate debt is at a record high share of GDP.

• The share of corporate debt in capital markets, such as corporate bonds and syndicated institutional 

leveraged loans, has grown.

• Corporate bonds and leveraged loans have become increasingly risky, as the share of low-rated bonds has 

grown and lender protections in leveraged loans have deteriorated.

• Direct bank exposure to corporate debt risks is concentrated in funded and unfunded revolving leveraged 

loans, traditional C&I loans, and mortgages, while indirect exposures are opaque.

Collateralized Loan Obligations (CLOs) held by banks are one source of bank exposure to the leveraged 

lending market. As of the first quarter of 2019, 16 percent ($96.0 billion) of U.S. CLOs were held by 

U.S. banks.27

• Large banks with more than $250 billion in assets accounted for 85 percent ($81.9 billion) of 

reported U.S. bank CLO holdings.

27The Call Report items used to estimate bank CLO holdings are only reported for banks with at least $10 billion in assets.

28 Nonfinancial corporate debt refers to debt obligations of nonfinancial corporations.

29 Federal Reserve Board and Bureau of Economic Analysis.

30Data on the increase in loans held by nondepository financial institutions are from the Federal Reserve Board, and data on the increase in leveraged loans 

are from S&P Leveraged Commentary and Data (LCD).

31“BBB” is on the scale used by credit rating agencies S&P and Fitch. Moody’s, the other major credit rating agency, uses the rating “Baa” for this category 

of credit risk.

32ICE Data Services.

Nonfinancial corporate debt levels are at all-time 

highs, driven by growth in corporate bonds and 

leveraged loans.28 U.S. interest rates have remained 

low for more than a decade after falling to near 

zero in the aftermath of the 2008 financial crisis. 

Partly in response to these low rates, corporations 

have taken on an increasingly large volume of debt. 

Nonfinancial corporate debt reached 46.9 percent 

in 2018—a record high relative to GDP (Chart 16).29

Corporate bonds and syndicated leveraged loans 

have grown far faster than other types of corporate 

debt, such as mortgages and traditional C&I bank 

loans, with outstanding institutional leveraged loans 

nearly doubling since 2008. Most of the increase in 

corporate debt outstanding in 2018 was due to 

a sharp increase in loans held by nondepository 

institutions, including a 20 percent increase in 

leveraged loans.30 Growth in leveraged loans has 

slowed moderately in 2019. 

Corporate bonds are the largest portion of corporate 

debt. Most of the rapid growth in bonds since 2008 

has occurred in the lowest-rated investment-grade 

categories. The share of bonds rated BBB,31 the 

lowest investment-grade category, was 49 percent 

of all investment-grade bonds in 2018, up from 33 

percent in 2008.32 This category of debt presents 

a source of risk because should these borrowers 

encounter challenges, some could be downgraded 

to high-yield or “junk” status. These “fallen angels” 

would then face higher borrowing costs, and their 

downgrade could disrupt the high-yield credit market. 

The current volume of BBB-rated bonds is nearly 

three times as large as the entire high-yield market, 

so borrowing costs could rise for other high-yield 

borrowers if the market struggles to absorb the new 

supply. Also, the amount of high-yield bonds that 

some types of investors (for example, mutual funds 

and pension funds) can hold is often restricted, which 

could lead to a wave of forced selling in the event of 

significant downgrades.
32 | 2019 Risk Review

0

10

20

30

40

50

60

70

80

90

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Chart 17

The Share of Leveraged Loans Lacking Strong Protective Covenants Has

Risen Sharply Since 2008

Source: S&P LCD

Note: Covenant-Lite share is of total issuance of institutional leveraged loans.

Covenant-Lite Share, Percent

50

Chart 16

Nonnancial Corporate Debt-to-GDP Is Elevated, Driven by an Increase

in Corporate Bonds

Debt-to-GDP Ratio, Percent

45

40

35

30

25

20

15

10

5

0

1951 1956 1961 1966 1971 1976

Mortgages

Other Loans

Depository Institution Loans

Corporate Bonds

Municipal Securities

Commercial Paper

1981 1986 1991 1996 2001 2006 2011 2016

Sources: Federal Reserve Board and Bureau of Economic Analysis (Haver Analytics)
2019 Risk Review | 33

Investors reaching for yield have increasingly funded 

leveraged loans to highly indebted companies that 

lacked traditional lender protections. Syndicated 

leveraged loans have typically contained provisions 

called “maintenance covenants,” which require the 

borrower to meet certain financial and performance 

metrics to remain in good standing on their loan. 

These covenants protect lenders from deterioration 

in borrower performance. Since 2010, leveraged 

loans have increasingly been issued without these 

protections.33 These loans are referred to as “cov-lite.”

The share of newly issued cov-lite institutional 

leveraged loans rose from less than 10 percent in 

2010 to about 85 percent in 2018 (Chart 17). The 

cov-lite share of leveraged loans declined slightly to 

79 percent in 2019 but remains well above the pre2018 period. Other aspects of leveraged loans have 

also become riskier. Leverage levels have risen to 

all-time highs, while loss-absorbing subordinated debt 

has largely disappeared.34 Reported leverage may 

also understate actual leverage, as earnings 

are now routinely inflated through earnings 

“add-backs” to account for expected increases in 

revenues or expected decreases in costs, which 

may not materialize. These add-backs increase the 

projected earnings used to calculate leverage ratios 

above the level of current earnings, making the 

borrower seem less leveraged and potentially allowing 

the borrower to obtain more preferential loan terms. 

These factors are likely to lead to lower recoveries 

and a more drawn-out default cycle if borrowers begin 

to have difficulty servicing their debt.35

Direct bank exposure to corporate debt is concentrated 

in revolving leveraged loans, CLOs, traditional C&I 

loans, and commercial mortgages, while indirect 

exposures are opaque and could transmit stress from 

the corporate sector into the banking system. Banks 

do not hold a significant amount of corporate bonds, 

so stress in the corporate bond market is unlikely to 

33 All data on leveraged loans are from S&P LCD.

34Leverage is measured as Debt/EBITDA and is higher than at any point since at least 2001 according to the first quarter 2019 S&P LCD Quarterly 

Leveraged Lending Review.

35Moody’s Investor Service, “Convergence of Bonds and Loans Sets Stage for Worse Recoveries in the Next Downturn,” August 16, 2018.

36FDIC.

37 S&P LCD.

38The Call Report line item for these data is labeled structured financial products. However, experience indicates that this line item is primarily CLOs.

39The first and third quarter 2018 Shared National Credit (SNC) Program examinations showed that less than half of SNC commitments were outstanding. 

This is only indicative, as not all loan commitments in the SNC program are leveraged loans.

affect banks directly.36 In the leveraged loan market, 

banks historically have been among the primary 

holders of institutional term leveraged loans. However, 

while U.S. banks continue to arrange and originate 

almost all of these loans, they have significantly 

trimmed their holdings. U.S. banks’ share of these 

loans was 7.3 percent in the first half of 2019, up 

from 2018 but down significantly from more than 

25 percent in 2000.37 CLOs and loan mutual funds 

have grown to fund the vast majority of institutional 

leveraged loans over the past two decades, reaching 

about 75 percent in 2019. Banks hold portions of 

CLOs, which expose banks to risks in the underlying 

leveraged loans. In early 2019, banks held more 

than $95 billion in CLOs, down moderately from the 

peak of $105 billion in 2016 but well above the $38 

billion held in 2010.38 Banks also are the primary 

source of funding for the revolving “pro rata” portion 

of the loans. Many of these revolving credits are likely 

undrawn, but borrowers could draw on these revolving 

lines before default should they face distress.39

Banks have other indirect exposures to corporate 

debt. Bank lending to nonbank financial firms (such 

as CLO arrangers and direct leveraged lenders) and 

their participation in derivatives markets (for example, 

total return swaps) can expose banks to risks in 

corporate debt markets. Bank-sponsored or affiliated 

funds with exposures to corporate debt or leveraged 

loans represent another potential source of exposure, 

as banks have felt compelled to step in and support 

their related funds during times of stress. Banks 

also are exposed to stress in corporate debt markets 

through macroeconomic effects such as slowing 

growth or rising unemployment. These factors could 

affect the performance of other bank loans, such as 

residential and commercial mortgages and C&I loans 

to small businesses.
34 | 2019 Risk Review

Nonbank Financial Institution Lending

• Banks are exposed, directly and indirectly, to nonbanks. This includes direct lending to nonbank 

financial institutions.

• Bank lending to nonbank financial institutions has expanded seven-fold since 2010 and exceeds 

$400 billion.

By lending to nonbank financial institutions, banks are 

accruing direct and indirect exposures to those 

institutions and to the risks inherent in the activities 

and markets in which they engage. FDIC analysis 

of Call Report data indicates that bank lending to 

nonbank financial institutions has expanded sevenfold since 2010 and now exceeds $400 billion 

(Chart 18). The largest banks are responsible for 

most of this lending, as the four largest banks 

reported 49 percent of all loans outstanding to 

nonbank financial institutions as of first quarter 2019. 

Lending to nonbank financial institutions includes 

loans to nonbank mortgage lenders and other 

nonbanks that do not primarily make loans, including 

private equity funds and real estate investment trusts. 

Outside of the loans extended by the four largest 

banks, supervisory experience indicates that most 

loans to nonbank financial institutions are to nonbank 

mortgage lenders or mortgage-backed securitizers. 

Through these loans, banks retain exposure to many 

of the loans that have shifted to nonbanks. 

While loans to nonbanks have grown steadily since 

2010, the volume of loans outstanding in first 

quarter of 2019 contracted slightly from year-end 

2018. Overall, loans to nonbank financial institutions 

account for less than 5 percent of total loans and 

leases reported by banks as of first quarter 2019, 

and less than 11 percent of all banks are engaged in 

this type of lending. While the total exposure remains 

small, lending to nonbanks could be risky because it 

is relatively untested in an economic downturn. It also 

indirectly expands the exposure of an institution to 

the lending activity of the nonbank. These activities 

include portfolio categories that have been historically 

risky, such as CRE. 

During first quarter 2019, loans to nondepository financial institutions held by FDIC-insured institutions 

totaled $414 billion. 

• Community banks hold less than 1 percent ($10 billion) of total loans to nondepository financial 

institutions. 

• The four largest noncommunity banks hold about half (49 percent) of all loans outstanding to 

nondepository financial institutions. 
2019 Risk Review | 35

Most of the funding that has supported increased 

nonbank engagement in mortgage origination and 

servicing activities is provided by banks through 

warehouse lines of credit. While these lines of credit 

can be a source of significant losses to banks, as 

they were during the financial crisis, they generally 

are considered relatively low risk because they are 

typically overcollateralized and subject to frequent 

monitoring. Ultimately, warehouse lines of credit to 

nonbank mortgage lenders directly expose banks to 

the liquidity and funding risks of nonbanks.

The measure of bank lending to nonbank financial 

institutions on the Call Report does not capture the 

entirety of bank exposure to nonbanks, including 

exposure to corporate bond and loan markets. As 

the section in this report on Leveraged Lending and 

Corporate Debt describes, direct bank exposure to 

corporate debt is concentrated in revolving leveraged 

loans, traditional C&I loans, CLOs, and commercial 

mortgages. Indirect exposures to corporate debt are 

opaque and could transmit credit risk and stress from 

the corporate sector into the banking system.

0

2

4

6

8

10

12

0

50

100

150

200

250

300

350

400

450

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Community Bank Loans to Nonbanks (Left Axis)

Noncommunity Bank Loans to Nonbanks (Left Axis)

Percent Share of Banks With Loans to Nonbanks

(Right Axis)

Chart 18

Driven by Noncommunity Banks, Bank Lending to Nonbank Financial

Institutions Now Exceeds $400 Billion

Loans to Nonbank Financial Institutions

(Billions of Dollars) Share of Banks with Loans to Nonbanks, Percent

Source: FDIC

Note: Quarterly data through rst quarter 2019.
36 | 2019 Risk Review

Interest Rate Risk and Deposit Competition 

• Rising interest rates and competitive pressures are headwinds to deposit growth. 

• Rising rates and deposit competition have begun pushing deposit costs higher and are affecting the 

mix of deposits, particularly at noncommunity banks.

• Most banks continue to report net interest margin growth, but banks with rising funding costs and a high 

proportion of long-term assets may face near-term margin pressure.

Banks have enjoyed years of abundant low-cost 

deposit funding in the aftermath of the Great 

Recession. While the Federal Reserve held the 

effective federal funds rate below 20 basis points 

between 2008 and 2015, FDIC-insured institutions 

reported an influx of low-cost deposits. Between 

December 2007 and June 2015, noninterest-bearing 

deposits as a share of assets doubled from 

9.7 percent to 19.6 percent, giving banks ample lowcost funding to support loan growth. Noncommunity 

banks were the greatest beneficiaries of the changing 

deposit mix, reporting a 10.6 percentage point 

increase in noninterest-bearing deposits to total 

assets compared with an increase of 6.0 percent for 

community banks. Interest-bearing deposit costs for 

the industry reached a new reported low of 33 basis 

points in third quarter 2015.

After a delayed response to the rising interest rate 

cycle that began in fourth quarter 2015, banks have 

begun to see a shift toward higher interest-bearing 

deposits and rising funding costs. After experiencing 

outsized growth in noninterest-bearing deposits, 

noncommunity banks have started to report faster 

growth in interest-bearing deposits (Chart 19). The 

noninterest-bearing deposits to total assets ratio for 

noncommunity banks peaked in second quarter 2017 

and declined 2.7 percentage points through first 

quarter 2019. Community banks have reported 

a plateau in their share of noninterest-bearing 

deposits to total assets, which grew at a more 

gradual rate than at noncommunity banks throughout 

the low interest rate period from 2008 to 2015. 

0

5

10

15

20

25

Community Banks

Noncommunity Banks

Sources: FDIC and Federal Reserve of St. Louis

Note: Quarterly data through rst quarter 2019.

Chart 19

Deposit Composition Is Just Beginning to Shift Back Toward

Interest-Bearing Balances, Despite Years of Interest Rate Increases

Noninterest-Bearing Deposits to Assets, Percent

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2019 Risk Review | 37

The cost of interest-bearing deposits has increased 

at both community and noncommunity banks since 

2015 (Chart 20). Noncommunity banks reported a 79 

basis point increase in interest-bearing deposit costs 

since December 2015, while community banks 

reported an increase of 61 basis points. Historically, 

community banks have relied more on deposits for 

funding than noncommunity banks, and they 

competed with those institutions for deposits by 

offering higher deposit rates. Now, with comparable 

deposit rates, community banks are in tighter 

competition with noncommunity banks, which tend 

to offer greater technological and network services 

than community banks. This competition could create 

added pressure for community banks to raise rates 

in order to avoid deposit attrition. In turn, the deposit 

mix could shift from noninterest-bearing to 

interest-bearing deposits, similar to the situation 

at noncommunity banks, which may compound the 

negative effect of higher interest rates on NIMs.

1.10

1.13

2.41

0

1

2

3

2015 2016 2017 2018 2019

Noncommunity Bank Average Cost of Deposits

Community Bank Average Cost of Deposits

Effective Federal Funds Rate

Sources: FDIC and Federal Reserve of St. Louis

Note: Quarterly data through rst quarter 2019.

Chart 20

Noncommunity Banks Report a More Rapid Increase in Their Cost of

Interest-Bearing Deposits Than Community Banks

Percent
38 | 2019 Risk Review

Increased competition for deposits has not yet 

significantly affected aggregate net interest margins. 

Banks have increased their yields on earning assets 

enough that NIMs have generally continued to grow, 

despite rising deposit costs. Noncommunity banks, 

which typically have shorter asset durations, have 

seen their asset yields and NIMs increase more than 

community banks, narrowing the gap in NIM between 

the two groups (Chart 21). As is typical in the first 

quarter of a year, both community and noncommunity 

banks reported a slight seasonal decline in NIM in first 

quarter 2019. While the first quarter decline was larger 

than in recent years, it is in line with historical values. 

While funding costs have been rising, 2,043 banks 

have seen their asset yields decline, putting further 

downward pressure on NIMs (Table 1). Second quarter 

NIM figures will help shed light on whether a broader 

shift is occurring in NIM trends. 

More than one-quarter of FDIC-insured institutions 

reported a 5 basis point or greater decrease in fullyear NIMs from December 2015 to December 2018 

(Map 3). The Midwest and Northeast have the highest 

share of banks reporting this decline. Increasing 

deposit pricing pressures and downward pressure 

on asset yields are a headwind to NIMs. Institutions 

whose NIMs are most at risk are those that increased

the share of long-term assets on their balance sheets 

in search for higher yields during the low-for-long 

interest rate environment of 2008 to 2015. 

3.38

3.67

2.41

0

1

2

3

4

2015 2016 2017 2018 2019

Noncommunity Bank Average Net Interest Margin

Community Bank Average Net Interest Margin

Effective Federal Funds Rate

Sources: FDIC and Federal Reserve of St. Louis

Note: Quarterly data through rst quarter 2019.

Chart 21

Noncommunity Banks Report a More Rapid Increase in Their Yield

on Assets and Therefore Stronger NIM Growth

Percent 
2019 Risk Review | 39

Table 1

Count of Banks by Total Asset Size

Source: FDIC

Map 3

The Midwest and Northeast Have Highest Share of Banks Reporting NIM Compression

Dots on map represent banks with more than a 5 basis point decline in NIM between 2015 and 2018.

Source: FDIC

Decline in Loan Yield 

9/30/15 to 12/31/18

Basis Points Over $100 

Billion

$10 Billion to 

$100 Billion

$1 Billion to 

$10 Billion

Under $1 

Billion Total

0 to 10 Decline 0 5 54 489 548

10 to 50 Decline 0 11 87 1,061 1,159

50 to 100 Decline 0 5 22 213 240

Over 100 Decline 0 0 12 84 96

Total 0 21 175 1,847 2,043
40 | 2019 Risk Review

Institutions with the highest share of long-term assets 

saw this strategy pay off during the low interest rate 

years. They reported stronger NIMs compared to 

banks with a lower proportion of long-term assets. 

Since the Federal Reserve began raising interest 

rates in December 2015, however, their yields have 

suffered from the relative rate insensitivity of their 

assets. Banks that entered the current rate cycle 

in the highest quintile of long-term assets to total 

assets (greater than 59 percent) reported a 49 basis 

point increase in their yield on earning assets since 

December 2015, but a 50 basis point increase in 

their cost of interest-bearing deposits (Chart 22). 

As a result, their NIMs have grown only 7 basis 

points.40 Their peers with the lowest proportion of 

long-term assets reported stronger increases in yields 

compared to deposit costs, and their NIMs grew by 

53 basis points. 

40NIM is yield on earning assets minus cost of funds; therefore, NIM and changes in NIM will not equal yield on earning assets minus the cost of interestbearing deposits.

Rural community banks face unique challenges 

regarding deposit retention. Many rural community 

banks face added deposit retention challenges 

associated with long-term, structural demographic 

shifts and, more recently, a downturn in agriculture 

that has caused some farm bank customers to shift 

from net depositors to net borrowers. Many rural 

communities have witnessed decades of ongoing 

population decline as younger adults move to larger 

urban areas, leaving rural communities with smaller 

and older populations. Community banks in these 

areas are challenged to maintain deposit growth in 

the face of shrinking depositor bases. Moreover, when 

elderly depositors pass away, it is not uncommon for 

deposits to flow to heirs living outside the community, 

exacerbating challenges of deposit retention.

128

84

53 49 50

7

Yield on Earning Assets Cost of Deposits Net Interest Margin

Lowest Share of Long-Term Assets

Second Quintile

Third Quintile

Fourth Quintile

Highest Share of Long-Term Assets

Chart 22

Deposit Competition Puts Margins Most at Risk at Banks With

a High Share of Long-Term Assets to Total Assets

Basis Point Change Since Federal Reserve Began Raising Rates

Source: FDIC

0

20

40

60

80

100

120

140
2019 Risk Review | 41

Liquidity

41Short-term liquid assets include cash and due from accounts, federal funds sold, securities purchased under resale agreements, and securities maturing 

in less than one year. Wholesale funding includes federal funds purchased and securities sold under agreement to repurchase; brokered and listing service, 

municipal and state, and foreign deposits; and other borrowings (such as from the Federal Home Loan Bank).

• Short-term liquidity levels have decreased in recent years for banks with assets of $100 billion or less. 

• Larger banks in this size range have fewer liquid assets and more wholesale funding compared to banks 

with assets under $1 billion.

• Institutions in the Northeast report the lowest liquid asset positions.

• Institutions with higher asset concentrations have lower liquid assets and higher wholesale funding.

• A turn in the credit cycle could be particularly detrimental to concentrated banks with lean 

liquidity positions.

Steady loan growth during the past several years has 

resulted in a decrease in short-term liquid assets and 

an increased reliance on wholesale funding sources 

for community banks. Over the past six years, shortterm liquidity positions declined more than 19 percent 

on a median basis at FDIC-insured institutions with 

total assets of less than $100 billion. During that 

time, reliance on wholesale funding increased more 

than 20 percent. First quarter 2019 median shortterm liquid assets were 9.7 percent of total assets, 

while median wholesale funding was 13.8 percent of 

total assets (Chart 23).41 Brokered and listing service 

deposits have grown steadily as a percentage of 

both total assets and total wholesale funding. Liquid 

assets on the balance sheet, including 

cash and federal funds sold, have decreased in 

relation to total assets. This shift in balance sheet 

structure has widened the gap between wholesale 

funding and short-term liquid asset ratios. 

Banks’ high demand for traditional customer deposits 

coupled with a limited supply of this type of deposit 

has spurred some institutions to turn to alternative 

funding sources to support loan growth. As shown in 

Chart 23, wholesale funding usage had been slowly 

but steadily rising in recent years until dropping 

slightly in 2019. To continue to support loan growth, 

many banks have increased their use of wholesale 

funding because of the availability and convenience 

of this source of funds.

0

2

4

6

8

Percent of Total Assets

16

14

12

10

2011 2013 2015 2017 2019

Liquid Assets

Wholesale Funding

Chart 23

Over the Past Six Years, Short-Term Liquidity Positions Declined While 

Reliance on Wholesale Funding Increased

15.0

8.9

11.5

13.8

9.7

2001 2003 2005 2007 2009

Sources: FDIC and U.S. Federal Reserve

Notes: Recessions shaded. Annual data as of rst quarter.

FDIC-Insured Institutions with Total Assets Under $100 Billion
42 | 2019 Risk Review

Among banks with assets of less than $100 billion, 

medium and larger institutions have tighter liquidity 

positions. For some community banks, liquidity is 

not a significant risk. However, liquidity is tightening, 

especially among institutions with total assets of 

more than $1 billion but less than $100 billion.42

As of first quarter 2019, institutions with total 

assets between $1 billion and $10 billion had a 

median short-term liquid asset ratio of 5.5 percent, 

while institutions with $10 billion to $100 billion in 

total assets had an even lower ratio of 3.5 percent 

(Chart 24). Comparatively, institutions with total 

assets of less than $1 billion had a median shortterm liquid assets to total assets ratio of 10.5 

percent. Community banks, which are mainly smaller 

institutions, have higher liquidity positions than 

noncommunity banks.

After declining for the past several years, liquidity 

levels at institutions with less than $10 billion in 

assets have stabilized. Liquidity levels continue to 

decline among banks with $10 billion to $100 billion 

in total assets. Banks require liquidity because they 

cannot always control the timing of their need for 

funds. Institutions must be able to fund new loans, 

make advances on existing lines of credit, and 

accommodate depositor withdrawals on short notice. 

42 Institutions with total assets greater than $100 billion, a total of 30 institutions as of year-end 2018, were excluded from the analysis because of their 

unique business models, highly complicated balance sheet structures, and specific regulatory liquidity coverage requirements that set them distinctly apart 

from a community bank model.

Institutions in the Northeast report the lowest liquid 

asset positions. The ratio of short-term liquid assets 

to total assets has declined at FDIC-insured banks 

across the country since 2012, similar to the 

declines in the asset size groups. Institutions in the 

Northeast report the largest decline in liquidity ratios 

and the lowest median short-term liquid asset ratio. 

Institutions in the Northeast historically have reported 

lower liquid asset positions compared with other 

geographic areas because of residential mortgage 

concentrations funded by Federal Home Loan Bank 

borrowings rather than deposits. Institutions in the 

Midwest have reported declining liquidity as farm 

customers produced lower cash flow and required 

higher levels of borrowing. 

Institutions in the South and West report the 

highest liquidity levels, with median short-term liquid 

assets accounting for more than 11 percent of total 

assets. Institutions in other regions of the country 

report median short-term liquid assets between 5.5 

percent and 10.5 percent of total assets.

2

4

6

8

10

12

14

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

$10 Billion–$100 Billion 

$1 Billion–$10 Billion

Less Than $1 Billion

Community Banks (Included in above)

Noncommunity Banks (Included in above)

Chart 24

Medium and Larger-Sized Institutions Have Tighter Liquidity Positions 

Source: FDIC

Note: Data as of rst quarter of each year.

12.5

5.5

Median Short-Term Liquid Assets, Percent of Total Assets

6.5

10.5

6.2

9.9

3.5
2019 Risk Review | 43

Institutions with additional risk factors, such as higher 

asset concentrations, have lower liquid assets and 

higher wholesale funding. More than 47 percent of all 

institutions report at least one elevated lending 

concentration in relation to total capital as of first 

quarter 2019. The majority of these institutions have 

concentrations in ADC loans, CRE loans, or agriculture 

loans.43 The median wholesale funding to total assets 

ratio among institutions with lending concentrations 

was 15.2 percent, while their median short-term liquid 

asset ratio was 8.2 percent (Chart 25). These levels 

compared with 12.9 percent and 11.5 percent, 

respectively, for all other institutions.

43 Elevated lending concentration metrics used for this analysis include institutions with lending portfolios in total agriculture, total CRE, C&I, consumer, or 

residential real estate over 300 percent of total capital, or institutions with lending portfolios in ADC over 100 percent of total capital.

A turn in the credit cycle could be detrimental to 

institutions with lean liquidity positions. In the current 

economic environment, most institutions have 

adequate liquidity. However, for institutions with low 

levels of liquidity or high levels of less stable funding, 

a downturn in the economy could be problematic. 

For example, institutions might take significant 

losses if they are forced to sell securities to meet 

liquidity demands. For institutions that experience 

eroding capital or other financial stress, wholesale 

funding may be limited by statutory restrictions, 

including caps on interest rates paid for deposits. 

Finally, institutions with asset quality problems or 

deteriorating financial condition might find their 

funding counterparties rescinding lines of credit or 

demanding higher collateral margins. 

17.5

15.2

7.3

8.2

12.9

11.5

0

2

4

6

8

10

12

14

16

18

20

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Wholesale Funding - Concentrated Institutions 

Liquid Assets - Concentrated Institutions 

Wholesale Funding - All Others

Liquid Assets - All Others 

Median Wholesale Funding and Median Short-Term Liquid Assets, Percent of Total Assets

Chart 25

Institutions With Other Risk Factors Such as Higher Asset Concentrations

Have Lower Liquid Assets and Higher Wholesale Funding

Source: FDIC

Note: Includes banks with a minimum of 5 percent of total capital. Data as of rst quarter of each year.