2021 Risk Review | 3

Section I: Executive Summary

2 The unemployment rate as measured by the Bureau of Labor Statistics based on the Current Population Survey reached the highest level since record collection 

began in 1948. 

After a prolonged period of relative stability, 

economic conditions deteriorated sharply in 

March 2020 following the onset of the COVID-19 

pandemic and closure of several key industries. The 

consumer, business, and banking sectors overall had 

entered 2020 in relative strength. Although corporate 

debt fundamentals raised concern, smaller businesses 

were growing and consumer balance sheets were strong. 

Many sectors of the economy were challenged as the 

pandemic unfolded, but federal programs provided 

timely and important support to affected industries 

and consumers throughout the year. The banking 

industry remained resilient entering 2021 despite the 

extraordinary challenges of the pandemic. Strong 

liquidity and capital levels at the start of 2021 should help 

to mitigate potential asset quality deterioration across 

loan portfolios. 

The economy entered the deepest recession in modern 

history in 2020 as millions of individuals lost their jobs 

and many small businesses closed. The unemployment 

rate rose to a record high and an unprecedented number 

of people filed for unemployment insurance.2 Extensive 

fiscal and monetary policy helped limit the impact 

of the crisis and prevent mass business bankruptcies 

and consumer defaults. Conditions remain weak 

for many service industries including restaurants, 

retail, entertainment, travel and tourism, and other 

discretionary services that do not allow for remote 

work. The economic environment poses a significant 

source of risk for the banking industry as the pandemic 

continues into 2021. Even after vaccinations are 

dispensed broadly across the population, the recovery for 

some of the most affected industries remains uncertain. 

Financial market conditions deteriorated sharply with 

heightened stress in early 2020, but most markets 

have since recovered. In March 2020, the onset of 

the pandemic severely disrupted financial markets, 

and equity and corporate bond markets saw sharp 

selloffs. Market conditions improved with the help of 

unprecedented federal support programs. Most markets 

fully recovered throughout the rest of 2020, and some 

exceeded pre-pandemic levels. 

The banking sector, though challenged by economic 

and financial market conditions, remained relatively 

resilient in 2020 and was a source of stability to the 

economy. The banking sector was helped by strong 

capital and liquidity levels as well as various government 

programs that enabled banks to extend loan forbearance 

and to provide support for consumers and businesses.  

Industry balance sheets remained sound through 2020, 

but banking income declined substantially. FDIC-insured 

institutions reported a 36.5 percent decline in income 

between 2019 and 2020, which was primarily driven by a 

sharp increase in provision expense during the first half 

of the year. Bank liquidity was supported in 2020 by a 

record increase in deposits. Deposits surged 22.6 percent 

between 2019 and 2020. The banking industry loan 

portfolio increased in 2020, primarily because of growth 

in commercial and industrial loans, including those 

made through the Small Business Administration 

(SBA) Paycheck Protection Program (PPP). Asset 

quality indicators deteriorated modestly but remained 

considerably better than those reported during prior 

recessions, partly because of government support 

extended during the year. 
4 | 2021 Risk Review

Key Risks to Banks 

FDIC-insured institutions faced a challenging landscape 

in 2020. Federal support programs cushioned the 

nation’s economy and muted the effects of the 

pandemic on the banking industry, but close monitoring 

of key risks remains essential. The discussion of 

risks in this report is organized by topic and ordered 

alphabetically, not by level of risk. 

Credit Risk: Banks are exposed to an array of credit 

risks. In 2020, these risks intensified as the economic 

contraction unfolded. Banks remained relatively 

resilient partly because of government support 

extended to businesses and consumers most affected 

by the recession. However, institutions with elevated 

levels of credit exposure to affected sectors are 

potentially more vulnerable to market disruptions and 

could present risk management challenges.

• Agriculture: The agriculture industry withstood 

the volatile 2020 marketplace with the help 

of record levels of government assistance and 

a rebound in commodity prices. As a result, 

agriculture bank conditions were sound as 

2020 came to a close. Strong farmland equity 

has enabled farmers to restructure loans to 

manage operating losses and replenish working 

capital. Asset quality at farm banks remains 

favorable. Net farm income in 2021 is expected 

to decline from last year but remain higher than 

historical levels.

• Commercial Real Estate: The pandemic 

challenged commercial real estate (CRE) market 

conditions in 2020. Conditions weakened sharply 

in lodging and retail sectors at the pandemic’s 

onset, and other property sectors face uncertainty. 

Increased use of remote work and potential shifts 

in behavior and preferences could influence the 

CRE outlook. The volume of CRE loans held by 

FDIC-insured institutions reached a record high 

at year-end 2020. Acquisition, development, and 

construction loans—historically, a riskier category 

of CRE loans—grew slightly in 2020 but were 

nearly 40 percent below the 2008 peak. Among 

FDIC-insured institutions, CRE loan performance 

metrics remain at manageable levels as loan 

accommodations have become part of the lending 

landscape.

• Consumer Debt: Conditions for consumers 

deteriorated with the onset of the pandemic 

as business closures contributed to doubledigit unemployment. Government programs 

have helped support household balance sheets 

and consumer loan performance during the 

pandemic. Consumer loan volumes fell in 2020 

as households pulled back on spending and used 

savings to reduce outstanding loan balances. While 

government support and improving economic 

conditions have helped consumers stay current on 

their loans, the outlook for consumer asset quality 

remains uncertain. An improving economy may 

result in stronger consumer loan performance and 

increased consumer lending opportunities.

• Energy: The energy market deteriorated sharply 

in 2020, but banks with exposure to lending in this 

sector remain resilient. Energy demand declined 

worldwide with the onset of the pandemic, 

causing energy prices to plunge. The market had 

already experienced substantial oversupply from 

a production policy impasse within the OPEC+ 

coalition and near-record U.S. production. After 

falling in early 2020, oil prices improved during 

the second half of the year as supply and demand 

imbalances improved. Oil and gas producers 

continue to face many challenges. Poor operational 

performance and escalating environmental, social, 

and governmental risks contributed to capital 

scarcity for producers. Banks with significant 

exposure to the energy market have shown 

resilience to these challenges. 

• Housing: Housing activity recovered strongly 

in 2020. After housing sales and starts 

deteriorated immediately after the onset of the 

pandemic, conditions recovered strongly during 

the rest of 2020. Low interest rates, increased 

demand to accommodate remote work, and a 

limited supply of homes contributed to record 

home price increases in 2020. Banks have benefited 

from increased housing market activity with slightly 

higher lending volumes and strong refinancing 

activity, although loan performance metrics of 

1–4 family residential mortgages at FDIC-insured 

institutions weakened slightly in 2020.
2021 Risk Review | 5

• Leveraged Lending and Corporate Debt: 

Corporate debt markets experienced disruptions 

early in the pandemic, but Federal Reserve 

actions helped to restore stability to bond and 

leveraged loan markets. Corporate debt levels 

were elevated before the pandemic and increased 

further in 2020 as bond issuance surged, pushing 

corporate debt-to-GDP to an all-time high as the 

level of corporate debt rose and GDP declined. 

Banks remain exposed to risks in corporate debt 

markets through direct loans and lines of credit 

to corporations, holdings of collateralized loan 

obligations, and participation in the arranging 

of leveraged loans and corporate bonds, as well 

as indirect macroeconomic effects of corporate 

debt distress on other loan portfolios. Banks with 

concentrations in loans to firms in especially hardhit industries could face elevated credit losses as 

those firms struggle to recover from the pandemic.

• Nonbank Financial Institution Lending: Bank 

exposure to nonbank lenders increased 

significantly in 2020, particularly in mortgage 

lending. Nonbank financial institutions relied on 

bank lending amid the uncertainty at the onset 

of the pandemic. Most of the lending to nonbank 

financial institutions occurs at the largest banks, 

but some community banks are a source of lending 

to nonbank mortgage lenders. The growth in 

banking sector exposure to nonbank financial 

institutions in 2020 increased the industry’s 

vulnerability to risks from nonbanks and their 

lending activities.  

• Small Business Lending: Small business 

conditions weakened significantly at the onset 

of the pandemic as stay-at-home orders and 

changing consumer behavior reduced economic 

activity. However, small business lending 

increased in 2020 primarily because of bank 

participation in the PPP. Further, small business 

closures and bankruptcies did not translate into 

credit deterioration in 2020. While asset quality 

remains at manageable levels, the long-term effect 

of the pandemic on small business asset quality 

is uncertain and remains an important source of 

credit risk for banks. 

Market Risk: The low interest rate environment 

presents earnings challenges to banks. However, bank 

liquidity positions remain strong as deposits grew 

rapidly in 2020. Uncertainty in the economy, coupled 

with a sudden rise in deposits, led many community 

banks to allocate a higher percentage of assets to 

readily available liquidity sources. Community bank 

reliance on wholesale funding decreased as deposits 

rose.

• Interest Rate Risk and Net Interest Margin: The 

low interest rate environment continues to 

pressure banking sector profitability. The net 

interest margin reached a record low as asset 

yields declined more than funding costs. The 

ratio of loans to total assets also declined for 

community and noncommunity banks in 2020, as 

strong deposit inflows exceeded loan demand. 

Community banks face interest rate risk challenges 

in a low interest rate and tepid loan environment. 

• Liquidity and Deposits: Banks entered 2020 with 

strong liquidity, and deposit growth during the 

year further increased liquidity levels. Deposits 

surged during the pandemic, as consumers and 

businesses responded to uncertainty by stockpiling 

cash. Federal programs created to mitigate 

economic stress contributed to unprecedented 

deposit growth. Increased on-balance sheet 

liquidity reduced many community banks’ reliance 

on wholesale funding. While industry liquidity 

improved last year, sudden changes in depositor 

behavior as pandemic conditions evolve warrant 

monitoring.