2021 Risk Review | 7

Section II: Economic, Financial 

Markets, and Banking Industry 

Overview

Economy

• The U.S. economy entered a recession in February 2020 as the pandemic caused a historic decline in economic 

activity.

• Labor markets deteriorated significantly in 2020 and remained weak despite the recovery that began in the 

second half of the year.

• Throughout 2020, substantial fiscal and monetary policy measures were enacted to support consumers and 

businesses.

• Conditions remain weak for many service industries including restaurants, retail, entertainment, travel and 

tourism, and other discretionary services that are not essential or do not allow for remote work. 

3 Quarterly GDP growth rates are expressed as a real seasonally adjusted annualized rate. 

The economy entered a recession in February 2020 as 

the onset of the pandemic halted economic activity. 

The economy started 2020 in a period of record-long 

expansion. The expansion ended abruptly with the 

onset of the pandemic and related restrictions on 

business and consumers. The decline in economic 

activity was swift, severe, and broad-based. U.S. real 

gross domestic product (GDP) contracted 5.0 percent in 

first quarter and continued to decline at a 31.4 percent 

annualized rate in second quarter, the sharpest decline 

on record (Chart 1).3 The economic contraction was 

widespread across sectors (Chart 2). 

Gross Domestic Product Declined in 2020 but Is 

Forecast to Recover in 2021

-40

-30

-20

-10

0

10

20

30

40

2014 2015 2016 2017 2018 2019 2020 2021 2022

Real U.S. Gross Domestic Product

Quarterly percent change at annual rate

Blue Chip 

Consensus 

Forecast

Average Growth Rate

1980–2006: 3.1 percent

2007–2019: 1.8 percent

Sources: Bureau of Economic Analysis (Haver Analytics), Blue Chip Forecasts 

(January 2021), and FDIC.

Chart 1

The Pandemic Affected All GDP Sectors in 2020

-50

-40

-30

-20

-10

0

10

20

30

40

50

Q1 Q2 Q3 Q4

Contribution to Change in GDP

Percent

Consumption

Business Investment

Government

Exports

Imports

Real Change in GDP

Source: Bureau of Economic Analysis (Haver Analytics).

Chart 2
8 | 2021 Risk Review

Containment efforts related to the pandemic 

contributed to declines in business and consumer 

spending. Both imports and exports declined in 

2020 as domestic consumption and global trade fell. 

Government spending at the federal level supported 

the economy but declined at the state and local levels 

because of increasing budgetary pressures. 

The economy began to slowly reopen in May and June. 

GDP grew by 33.4 percent in third quarter, recovering 

roughly two-thirds of the contraction in the first half of 

the year. Economic activity moderated in fourth quarter 

as the initial impact of reopening waned and resurgence 

of the pandemic resulted in tighter restrictions in some 

states. GDP grew by 4.0 percent in fourth quarter, well 

below the record third quarter pace. 

The economic recovery has been uneven across sectors, 

in a pattern that is atypical of recessions. While all 

sectors were initially hit hard during the onset of the 

pandemic, goods-producing sectors have recovered 

relatively quickly and service sectors have lagged. 

Traditionally, the services portion of consumption is 

less affected by downturns, but the unique nature 

of this pandemic-driven recession has hit this sector 

particularly hard. Goods-producing sectors have 

benefited from consumer and business spending related 

to the transition to a remote work environment.

The unemployment rate reached new highs in 2020, 

and employment prospects for key service sectors 

remain weak. The unemployment rate increased 

rapidly from 3.5 percent in February, the lowest 

level in decades, to 14.8 percent in April, the highest 

unemployment rate since the Great Depression (Chart 3). 

Initial unemployment insurance claims rose by more 

than one million, well above the previous recorded 

peak. The partial reopening of the economy caused the 

unemployment rate to retreat from its record highs, 

but labor market improvement moderated during the 

second half of the year. The unemployment rate at the 

end of 2020 was 6.7 percent. 

While more than half of the jobs lost in March and April 

were recovered by year end, job growth was uneven 

across industries. Employment in industries that require 

face-to-face interaction with customers, jobs that cannot 

be performed remotely, and jobs related to discretionary 

and leisure activities had the largest losses and 

recovered the slowest (Chart 4). Leisure and hospitality—

primarily restaurants and drinking establishments—have 

been especially hard hit as consumers reduced such 

activities and many state and local orders limited the 

operating capacity of these establishments through the 

end of 2020 and into early 2021. Government job losses 

have been elevated and have been concentrated at the 

state and local level as states contend with tight budgets 

from greater spending and lower tax revenue from the 

decline in economic activity. Job losses in education 

The Unemployment Rate Reached New Highs in 2020 but Has Begun to 

Recover

0

5

10

15

20

25

1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Civilian Unemployment Rate

Percent

Unemployment Rate

(Bottom Line)

Unemployed+ 

Marginally Attached+ 

Part Time for 

Economic Reasons 

(Top Line)

Source: Bureau of Labor Statistics (Haver Analytics).

Note: Shaded areas indicate recessions.

Chart 3
2021 Risk Review | 9

and healthcare were affected by school closures and by 

patients and providers forgoing nonemergency elective 

services. 

Individual states and regions have faced uneven 

economic conditions owing to the spread of COVID-19 

and the nature of public health orders.4 As the virus 

first halted economic activity in the United States in 

March 2020, some states enacted stay-at-home orders 

sooner and with tighter restrictions than other states. 

Despite the recovery in the second half of the year, most 

states ended 2020 with higher unemployment rates than 

before the pandemic (Map 1). In addition, other factors 

at the state and local level affected the magnitude of 

the economic disruption and speed of reopening. States 

with a higher share of industries most affected by the 

pandemic, such as leisure and hospitality, experienced 

larger increases in unemployment. The speed of states’ 

labor market recovery in the third and fourth quarters 

depended partly on when public health orders and other 

pandemic safeguards were lifted.

Both the federal government and the Federal Reserve 

enacted fiscal and monetary policies to support the 

4 For this analysis, regions are Census Regions and Divisions of the United States. See U.S. Census Bureau at https://www2.census.gov/geo/pdfs/maps-data/maps/

reference/us_regdiv.pdf.

economy. Monetary and fiscal policies were put in place 

quickly to help combat the economic effects of the 

pandemic on the economy. Congress passed stimulus 

packages in March, April, and December that included 

several major components to help households and 

businesses. Support to households included two rounds 

Map 1

Unemployment Increased in Most States but Unevenly

Percentage Point Change in Unemployment Rate

February to December 2020

-1.0 to 1.0

1.1 to 3.2

3.3 to 4.2

Greater than 4.2

Percentage Point Change

National Increase: 3.2 Percentage Points

Source: Bureau of Labor Statistics (Haver Analytics).

Job Losses Were Uneven Across Industries

-4,500 -4,000 -3,500 -3,000 -2,500 -2,000 -1,500 -1,000 -500 0

Net Jobs Lost March to December 2020

Thousands

Leisure & Hospitality

Government

Education & Health

Professional Services

Manufacturing

Other Services

Retail Trade

Wholesale Trade

Information

Construction

Transportation

Financial Activities

Mining

Utilities

Source: Bureau of Labor Statistics (Haver Analytics).

Chart 4
10 | 2021 Risk Review

of direct stimulus payments to qualifying individuals, 

expanded and extended unemployment insurance 

benefits, and new unemployment benefits that covered 

workers not traditionally covered by unemployment 

insurance. Congress also put in place eviction moratoria 

and forbearance programs. Businesses benefited from 

the creation of the PPP, which offered support in the 

form of loans. To extend the support to households 

and businesses, Congress passed additional rounds 

of stimulus in December 2020 and March 2021 that 

included an extension of unemployment benefits and 

the PPP, among other measures. 

The Federal Reserve also took expansive action 

implementing monetary policies to support financial 

markets. The Federal Open Market Committee reduced 

the federal funds rate to the zero lower bound in 

two emergency meetings in March and signaled that 

rates will remain low until economic conditions have 

recovered (Chart 5). 

The Federal Reserve also restarted several emergency 

lending programs developed during the Great Recession 

and introduced new programs to support the economy. 

While the take-up of the new facilities was modest, they 

helped support market confidence. 

Weak labor market conditions pose risks to banks 

through potential asset quality deterioration. As 

people are laid off from work, particularly for an 

extended period, they may be forced to draw down their 

savings and prioritize certain expenditures, increasing 

the risk of rising loan delinquency and default rates for 

consumer loans and residential mortgages. In addition 

to debt servicing issues, unemployment or uncertainty 

about employment also reduces demand for new loans, 

limiting the prospects for new loans in the medium 

term. Banks may also respond by tightening standards 

for loans, which would further reduce loan growth. 

Fiscal stimulus in the form of government transfer 

payments, extended and enhanced unemployment 

insurance benefits, forbearance programs, and eviction 

moratoria supported unemployed consumers in 2020. In 

fact, aggregate personal income increased in 2020. 

Many businesses, especially small businesses, were 

closed due to public health orders in 2020, increasing 

risk to asset quality for banks. The unique nature of 

the pandemic-driven recession halted economic activity 

broadly, harming businesses and individuals. Surveys on 

business closures suggest that at the height of stay-athome orders in April, almost 50 percent of businesses 

were temporarily closed. While those numbers improved 

as the economy reopened, surveys suggest that more 

than 20 percent of businesses remained closed at yearend 2020, relative to a year earlier. Missed payments 

on business loans increased across a wide range of 

industries during the early stages of the pandemic, 

though delinquency rates have stabilized as parts of the 

economy reopened and various federal programs were 

The Federal Reserve Reduced the Federal Funds Rate in Support of the 

Economy

0

1

2

3

4

5

6

7

8

9

Federal Funds Rate Target

Percent

Median Federal

Open Market

Committee 

Projection

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Source: Federal Reserve (Haver Analytics).

Note: Shaded areas indicate recessions.

Chart 5
2021 Risk Review | 11

implemented.5 The public health aspect of this recession 

may affect or reshape whole industries, creating more 

prolonged distress to banks that specialize in certain 

types of loans. In addition, the economy re-entered 

a historically low interest rate environment that may 

alter, at least temporarily, the composition of bank 

profitability but also may provide new channels for 

lending and banking services for large and community 

banks. These risks and challenges are discussed in more 

detail later in this report. 

5 For more information, see the U.S. Census Bureau Small Business Pulse Survey at https://www.census.gov/data/experimental-data-products/small-business-pulsesurvey.html. 

The nation’s economic outlook may improve as more 

of the population becomes vaccinated, but economic 

conditions remain uncertain and vary greatly across 

sectors and geographies. The banking outlook should 

improve with overall economic conditions, but 

improvement in the banking outlook may be more 

gradual than GDP growth or improvement in the 

unemployment rate.
12 | 2021 Risk Review

Financial Markets

• In March 2020, the onset of the COVID-19 pandemic severely disrupted financial markets; equity and corporate 

bond markets saw sharp selloffs.

• Market conditions improved with the help of unprecedented federal support programs. Most markets fully 

recovered by the end of 2020.

• Several key markets related to vulnerable industries, such as energy, remained below pre-pandemic highs.

• Corporate bond issuance set a record in 2020 as companies sought cash to ride out pandemic disruptions and 

later took advantage of historically low interest rates.

In March 2020, severe financial market disruptions 

were calmed with the help of unprecedented Federal 

Reserve support. Prices in oil and equity markets 

declined sharply in late February and early March, as 

these markets were among the first to anticipate the 

material effects that the pandemic would have on the 

economy. Corporate investment grade and high-yield 

bond markets as well as municipal bonds subsequently 

experienced a rapid selloff. Market liquidity deteriorated 

as transaction costs increased and some securities 

dealers pulled back from making markets. 

One of the most concerning disruptions in the market 

selloff was the volatility of Treasury securities, critical 

benchmarks for financial assets. Treasury yields fell 

rapidly at the onset of the pandemic before forced 

selling (in a “dash for cash”) caused yields to shoot 

back up. One source of selling pressure was corporate 

bond funds. Outflows from corporate bond funds 

compelled those funds to sell Treasury securities they 

held as liquidity buffers. The selloff was exacerbated 

by hedge funds that were buying Treasuries but were 

forced to sell after reaching stop-loss limits. During the 

selloff, Treasury bid/ask spreads widened and liquidity 

deteriorated. 

Financial markets stabilized in the days after the Federal 

Reserve dropped its target federal funds rate to near 

zero and pledged to purchase at least $500 billion of U.S. 

Treasuries. The Federal Reserve followed through on 

that pledge, purchasing Treasury and agency securities 

at an unprecedented rate (Chart 6).

The Federal Reserve’s Balance Sheet Expanded More Rapidly in 2020 Than 

in 2008

0

1

2

3

4

5

6

7

8

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Total Assets

Securities Held Outright

All Liquidity Facilities

Support for Specific Institutions

Federal Reserve Balance Sheet Assets

$ Trillions The Federal Reserve’s balance sheet

grew by $2.5 trillion in two months.

The Federal Reserve’s liquidity facilities enhanced

confidence and helped stabilize markets, despite seeing less 

usage than the facilities in eect during the Great Recession.

Source: Federal Reserve.

Note: All Liquidity Facilities includes Term Auction credit, primary credit, secondary credit, seasonal credit, 

Primary Dealer Credit Facility, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, 

Term Asset-Backed Securities Loan Facility, Commercial Paper Funding Facility, Money Market Mutual Fund 

Liquidity Facility, and central bank liquidity swaps. 

Chart 6
2021 Risk Review | 13

Beginning in late March through early April, the Federal 

Reserve increased its market support by unveiling 

11 emergency lending programs.6 These backstop 

programs contributed to lower interest rates and 

borrowing costs in corporate bond, securities, and 

other markets, despite limited usage. These programs 

also served to stabilize financial markets by providing 

liquidity during a period of heightened uncertainty. The 

Federal Reserve aided the recovery of financial markets 

throughout the rest of 2020 by setting expectations for 

maintaining an accommodative stance—both in terms of 

rates and asset purchases—into the foreseeable future.

After touching all-time lows in August 2020, 

benchmark interest rates started on an upward 

trajectory that continued through the end of the 

year and into 2021. The 10-year Treasury yield 

fluctuated considerably in March with the heightened 

uncertainty at the onset of the pandemic, including 

setting an all-time low of 0.54 percent on March 9, 

2020. The benchmark rate reached a new record low of 

0.52 percent on August 4, 2020, amid renewed concerns 

about the economic outlook. The August low marked 

the beginning of a period of rising rates, as investors 

looked more optimistically toward a post-COVID-19 

recovery. By year end, the yield on the 10-year Treasury 

had increased to 0.93 percent from its August low as 

prospects for the recovery improved (Chart 7).

6 For more information on the Federal Reserve’s funding, credit, liquidity, and loan facilities, see https://www.federalreserve.gov/funding-credit-liquidity-and-loanfacilities.htm. 7BBB-rated bonds are the lowest-rated bonds considered investment grade and also make up the largest segment of investment grade bonds.

The yield curve steepened throughout 2020. The 

difference between the 10-year Treasury yield and the 

2-year Treasury yield, a commonly cited measure of the 

yield curve, more than doubled from 34 basis points at 

the beginning of 2020 to 80 basis points at the end of 

2020. Another measure of the yield curve, the difference 

between 30-year and 5-year Treasury yields, increased 

from 70 to 129 basis points by the end of 2020. Early in 

the year, the yield-curve steepened as the decline in 

short-term interest rates outpaced the decline in longterm rates. During the last five months of 2020 (and into 

2021), the yield curve saw additional steepening as longterm interest rates rose and short-term rates remained 

near zero. 

Stabilizing debt markets and historically low yields led 

to a record amount of investment grade and high-yield 

corporate bond issuance in 2020. During the March 

2020 market stress, corporate bond spreads widened 

dramatically. For example, the additional yield investors 

required for BBB-rated corporate bonds relative to 

Treasury bonds neared 5 percent at one point, up from 

1.3 percent at the start of the year.7 After the introduction 

of Federal Reserve support, corporate bond spreads 

gradually declined from March highs and reached prepandemic levels by the end of the year. The combination 

of low benchmark rates and declining spreads resulted 

in historically low borrowing rates. Several offerings 

After a Period of Volatility in March, the 10-Year Treasury Yield Ended the 

Year on an Upward Trajectory

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan-2020 Mar-2020 May-2020 Jul-2020 Sep-2020 Nov-2020 Jan-2021

Yield

Percent

10-Year Treasury Yield

2-Year Treasury Yield

The 10-Year Treasury yield ended 

the year on an upward trajectory.

The 10-Year Treasury yield

experienced volatility in March.

Source: Federal Reserve Board (Federal Reserve Economic Data). 

Chart 7
14 | 2021 Risk Review

from highly rated companies ranked among the lowestcoupon corporate issuances ever.

Companies responded to the low-rate environment by 

issuing $2.3 trillion in corporate bonds, the most ever in 

a year (Chart 8). The 2020 issuance was 60 percent above 

the 2019 level, despite slowing issuance at the end of the 

year. The largest increase was from investment grade 

issuers, but high-yield issuance also rose, up 51 percent 

from 2019. While companies benefited by locking in low 

rates, the continued rise in corporate debt levels makes 

bond issuers vulnerable to the risk of refinancing at 

higher interest rates. 

The municipal bond market also saw record issuance 

in 2020 with an upward trend in taxable debt as a 

share of total municipal bonds. Like corporate bond 

spreads, municipal spreads widened in March and 

narrowed following the Federal Reserve’s market 

support. Faced with low borrowing rates, municipalities 

set a record for issuance in 2020 with $476 billion in 

offerings. Taxable bond issuance more than doubled in 

2020, while non-taxable bond issuance decreased. As 

a share of total municipal issuance, taxable debt rose 

to 31 percent in 2020 from 17 percent in 2019 and just 

8 percent in 2018. Low interest rates have allowed cities 

and states to refinance older tax-exempt debt, replacing 

the older debt with lower-coupon taxable bonds.

The pandemic and related government actions had a 

large impact on equity market movements throughout 

8 The full-year 2020 return for the Russell 2000 was 20.0 percent.

the year. Overall, the stock market performed well in 

2020. The Standard and Poor’s (S&P) 500 Index finished 

the year up 16.3 percent, and the Dow Jones Industrial 

Average finished up 7.3 percent. But this period was 

characterized by market movements responding to 

pandemic developments throughout 2020.

After falling as much as 34 percent from its peak, the 

S&P 500 Index rose largely on the performance of its five 

largest constituent companies. The companies were 

predominately technology providers whose business 

models performed well during the pandemic. By July, 

the top five stocks accounted for 22 percent of S&P 500 

Index market capitalization, a record dating back to at 

least 1980. Technology stocks generally performed well 

in 2020, in part because demand for those companies’ 

products increased sharply in the remote work world. 

Historically low benchmark rates also helped propel the 

NASDAQ Composite to a 43.6 percent return for the year.

News of vaccine developments in the latter part of 

the year contributed to strong performance of smaller 

stocks, as investors anticipated a recovery for companies 

affected by the pandemic. The Russell 2000, a smallcap index, had the best quarter in its history in fourth 

quarter 2020 with a return of 31.4 percent.8

Bank stocks underperformed in 2020. The KBW Bank 

Index, which includes 24 of the largest U.S. banking 

organizations, fell 13.6 percent in 2020. The broader S&P 

500 Financials sector was the third-worst performer 

Corporate Bond Issuance Jumped in 2020

0.0

0.5

1.0

1.5

2.0

2.5

2012 2013 2014 2015 2016 2017 2018 2019 2020

Corporate Bond Issuance

$ Trillions

Corporate bond issuance 

increased by 60% over 2019.

High-Yield Investment Grade

Source: Securities Industry and Financial Markets Association.

Chart 8
2021 Risk Review | 15

out of 11 sectors, falling 4.1 percent. Bank stock 

underperformance reflected the weak outlook for banks 

that persisted for much of 2020. However, this outlook 

improved at the end of the year on rising long-term 

interest rates, and bank stocks recovered some ground 

in early 2021.

The VIX, a frequently cited measure of expected 

volatility, remained elevated for the last ten months 

of 2020. The Chicago Board Options Exchange Volatility 

Index (VIX) jumped in March to more than six times its 

level at the start of the year and reached its highest mark 

since 2008 and the highest end-of-day reading ever. As 

market strains eased, the VIX fell but remained elevated 

for the rest of 2020.9 It is somewhat unusual for the VIX 

to remain elevated while equities perform well, as they 

did the last three quarters of 2020.

Oil companies were some of the hardest hit by the 

pandemic. Demand for oil dropped precipitously in 

the spring as businesses closed and people worldwide 

stayed home to combat the pandemic. Oil producers 

9The VIX did not close below 20 during the last ten months of 2020 compared to a long-term historical average of about 19 coming into the year.

could not shut off supply fast enough and oil storage 

began to reach capacity. The supply and demand 

mismatch became so extreme in April that the price of 

oil, as measured by the West Texas Intermediate futures 

contract, briefly turned negative (Chart 9).

While other markets rebounded strongly, oil prices did 

not fully recover in 2020. The S&P 500 Energy sector 

dropped 37.3 percent in 2020 despite an overall increase 

in the S&P 500 of 16.3 percent. 

By year end, financial market conditions were stable 

with strong price gains in many markets, particularly 

corporates and equities. Financial market conditions 

reflected the improved economic conditions and 

outlook. Investor risk appetite returned and markets’ 

risky assets, including high-yield corporate bonds, 

recovered. While financial market conditions have 

improved significantly, they remain sensitive to 

developments related to the pandemic. Significant 

volatility and shifts in interest rates may pose challenges 

to the banking sector.

In April, Oil Prices Turned Negative for the First Time in History

-60

-40

-20

0

20

40

60

80

Mar-2020 May-2020 Jul-2020 Sep-2020 Nov-2020

Crude Oil Price, West Texas Intermediate

$ Per barrel

Source: U.S. Energy Information Administration (Federal Reserve Economic Data).

Note: Data are from January 2020 through December 2020.

Chart 9
16 | 2021 Risk Review

Banking Industry

• The COVID-19 pandemic introduced new challenges to the banking industry.

• FDIC-insured institutions reported lower net income in 2020 compared with 2019, primarily because of higher 

provision expense and lower net interest income.

• Deposits surged in 2020 on economic uncertainty and increased savings by consumers.

• The aggregate banking industry loan portfolio grew in 2020 owing to an increase in commercial and industrial 

(C&I) loans, which included PPP loan originations.

• Asset quality indicators deteriorated modestly in 2020 but remained strong partly because of government 

assistance for borrowers.

The COVID-19 pandemic introduced new challenges.

When mandatory stay-at-home orders were put in place 

at the onset of the pandemic, banks had to quickly adapt 

to provide and maintain an acceptable level of customer 

service while limiting branch access. Banks pivoted to 

remote access to banking services through online and 

mobile applications, and many banks shifted employees 

to remote work to ensure their safety. To safeguard the 

security and privacy of customer information, some 

banks built out telecommunications infrastructures, 

increased Internet capacity in data centers, and enhanced 

application portfolios to enhance remote productivity. 

Despite changes in the operating environment and 

challenges presented by the pandemic, the banking 

industry continued to report positive financial 

performance and strong capital levels in 2020. The 

5,001 FDIC-insured financial institutions benefited from 

positive net income, robust deposit growth, and strong 

asset quality metrics. Total bank equity capital grew 

5.4 percent in 2020 and reached the highest level on 

record. Common equity tier 1 capital grew 7.5 percent, 

increasing resiliency to sustain potential losses in the 

future. As of December 31, the FDIC’s “Problem Bank 

List” included 56 institutions, well below the crisis peak 

of 888 in 2011. Only four banks failed in 2020.

The banking industry reported net income of 

$147.9 billion in 2020, down 36.5 percent from a year 

earlier. The decline in banking industry net income 

was largely due to higher provisions for loan and 

lease losses reflecting economic concerns due to the 

pandemic and partially due to the implementation of 

the Current Expected Credit Losses (CECL) accounting 

standard that requires estimating credit allowances for 

the life of a loan. Insured institutions reported $132.2 

billion in provisions in 2020, up $77.1 billion from 

2019 (Chart 10). The increase in provisions, however, 

Increase in Provision Expense Drove Decrease in Net Income

-20.0

15.9

77.1

32.0

4.2

-24.5

-100 -84.9

-80

-60

-40

-20

0

20

40

60

80

100

Annual Change

$ Billions

Net Interest 

Income

Noninterest 

Income

Provision

Expense

Noninterest

Expense

Securities

Gains

(Losses)

Applicable

Income

Taxes

Net Income

Source: FDIC. 

Note: Annual data as of fourth quarter 2020.

Chart 10
2021 Risk Review | 17

was largely concentrated in the first half of the year. 

Faced with much uncertainty and concerns due to the 

pandemic, government-issued lockdowns, and increase 

in unemployment, banks reserved $114.3 billion in the 

first half of the year. As the economic outlook improved 

and progress was made in developing a vaccine, banks 

released their provision expenses in the latter half of 

the year. In fourth quarter 2020, net provision expenses 

declined to $3.5 billion, the lowest quarterly level since 

second quarter 1995.

Interest rate cuts in the first half of 2020 pressured yields 

on earning assets. Net interest income decreased by 

3.7 percent in 2020 to $526.6 billion. Annual net interest 

margin (NIM) for the industry fell to 2.82 percent, down 

53 basis points from year-end 2019 (Chart 11). This 

was the lowest annual NIM since year-end 1984, when 

data collection began. Continued low interest rates 

and ensuing NIM compression may pose earnings and 

liquidity challenges for some institutions, particularly 

those that rely heavily on interest income.

As of December 31, 2020, community banks reported 

an annual NIM of 3.39 percent, the lowest since yearend 1988. Relative to the banking industry as a whole, 

community bank NIM benefited from higher yields 

from holding more long-term earning assets. While 

this helped community banks in 2020, it may present 

challenges going forward as assets mature and begin to 

reprice at lower yields.

Noninterest income rose 6 percent to $280.2 billion from 

a year earlier, largely due to an 89.3 percent increase 

in net gains on loan sales as record low mortgage rates 

coupled with a strong demand for larger homes boosted 

housing sales and refinances. Noninterest expense rose 

6.9 percent to $498.2 billion in 2020, primarily because of 

salary and employee benefits expenses. 

The banking industry saw unprecedented deposit 

growth in 2020 as increased economic and market 

uncertainty shifted consumer and business spending 

and saving behavior. Expanded monetary policy, 

coupled with government assistance and support 

programs, including stimulus and unemployment 

payments and the PPP, bolstered cash for consumers 

and businesses, which further supported deposit 

growth and personal savings. Total deposits increased 

$3.3 trillion, or 22.6 percent, in 2020, the largest annual 

growth since 1984 (Chart 12). The influx of cash resulted 

in increased balance sheet liquidity and decreased 

reliance on wholesale funding. Community banks 

mirrored the industry’s deposit growth, reporting a 

$330.5 billion (18.4 percent) increase in deposits during 

the year.

The growth in deposits resulted in a large increase in 

assets, which led to a lower return on assets ratio (ROA) 

in 2020. Assets grew $3.2 trillion (17.4 percent) in 2020, 

well above the 2008 to 2019 average of 3.1 percent. 

Much of the growth was in low-yielding assets. Cash and 

balances due from depository institutions increased $1.5 

Net Interest Margin Hit a Record Low

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

Community Banks (3.39 percent)

Industry (2.82 percent)

Net Interest Margin

Percent

Source: FDIC. 

Note: Data as of fourth quarter 2020. 

Chart 11
18 | 2021 Risk Review

trillion (91.2 percent), while securities grew $1.1 trillion 

(28.4 percent) in 2020. Net loans and leases increased 

by a modest 2.2 percent. The annual ROA ratio for the 

industry fell to 0.72 percent at year-end 2020, 57 basis 

points lower than year-end 2019. Community banks 

reported a more modest decline in the ROA ratio to 

1.09 percent, 10 basis points below year-end 2019. This 

was the first year since 2008 that the community bank 

ROA ratio surpassed the industry (Chart 13). 

Banking industry loan growth was primarily driven 

by rapid growth in the C&I loan portfolio in 2020.

Total loans increased $345 billion during the year, led 

by a $232.8 billion increase in C&I loans as businesses 

drew down credit lines as a precautionary measure 

to support liquidity and as banks provided PPP 

loans. Excluding PPP loans, total C&I loans would 

have contracted by nearly 8 percent in 2020. At the 

end of fourth quarter 2020, 83 percent of all banks 

and 84 percent of community banks held PPP loans 

totaling $407 billion. Growth in nonfarm nonresidential 

properties (up $52.4 billion) and construction and 

development loans (up $24.3 billion) also contributed 

to net loan growth (Chart 14). Due to increased saving 

and reduced spending stemming from stay-at-home 

restrictions and behavioral changes from the pandemic, 

The Return on Assets Ratio Declined as Assets Grew in 2020

-0.5

0.0

0.5

1.0

1.5

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Annual Change in Assets (Le Axis)

Industry ROA Ratio (Right Axis)

Community Bank ROA Ratio (Right Axis)

Assets

$ Billions 

Return on Assets

Percent

Source: FDIC. 

Note: Data as of fourth quarter 2020.

Chart 13

Annual Deposit Growth Reached a Record High

-5

0

5

10

15

20

25

30

35

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Industry Annual Change in Total Deposits (Le Axis)

Industry Annual Deposit Growth (Right Axis)

Community Bank Annual Deposit Growth (Right Axis)

Deposits

$ Billions

Deposit Growth

Percent

Source: FDIC. 

Note: Data as of fourth quarter 2020. 

Chart 12
2021 Risk Review | 19

loans to individuals declined $93.3 billion (5.1 percent), 

led by a $119.5 billion (12.7 percent) decrease in credit 

card loans, the highest fourth quarter year-over-year 

reduction in both categories since 1985. 

Despite modest deterioration, asset quality indicators 

remained relatively strong at year-end 2020. As of 

December 31, 2020, the noncurrent loan rate for the 

banking industry was 1.18 percent, up 28 basis points 

from year-end 2019 but well below the high of 5.44 

reached in year-end 2009. The annual net charge-off rate 

was 0.50 percent, down 2 basis points from year-end 

2019 and well below the high of 2.55 percent at yearend 2010 (Chart 15). Community banks also reported 

modest asset quality deterioration in 2020, but the 

noncurrent rate of 0.77 percent and the charge-off rate 

of 0.12 percent remained below the industry overall. The 

industry’s coverage ratio, which compares the amount 

of loan-loss reserves to noncurrent loans, jumped to 

184.1 percent in 2020 (up 54.2 percent from 2019) owing 

to the significant increase in provisions for loan and 

lease losses. 

Government assistance and forbearance programs 

for some mortgages and student loans have helped 

to support asset quality during the pandemic. The 

Asset Quality Indicators Remained Relatively Strong at Year-End 2020

0

25

50

75

100

125

150

175

200

0

1

2

3

4

5

6

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Noncurrent Loan and Lease Rate (Le Axis)

Net Charge-Off Rate (Left Axis)

Coverage Ratio (Right Axis)

Noncurrent and Net Charge-Off Rate

Percent

Coverage Ratio

Percent

Source: FDIC. 

Note: Data as of fourth quarter 2020.

Chart 15

Commercial and Industrial Loans Led Loan Growth

-5

0

5

10

15

20

25

2015 2016 2017 2018 2019 2020

Total Loans & Leases

Commercial & Industrial

Construction & Development

Secured by 1–4 Family Residential Properties

Nonfarm Nonresidential Real Estate

Loans to Individuals

12-Month Growth Rate

Percent

Source: FDIC. 

Note: Data as of fourth quarter 2020.

Chart 14
20 | 2021 Risk Review

PPP further supported small businesses by providing 

potentially forgivable loans to cover eligible expenses. 

In addition, relief measures by federal banking 

regulators that have prevented loans from advancing to 

delinquency status have also helped to support asset 

quality at insured institutions.10

Consistent with pre-pandemic trends, branch 

reductions continued in 2020 as banks leveraged 

digital delivery channels and consumers embraced 

online banking. As of June 30, 2020, Summary of 

Deposits data showed there were 85,040 branches, 

down 1.6 percent from June 30, 2019 (Chart 16). 

Branches of community banks decreased at a higher rate 

of 2.7 percent. 

10See Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus, April 07, 2020, https://

www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200407a1.pdf. 11Net charter consolidation is the sum of the number of failures, intra-company consolidations, inter-company mergers, new charters, and other closings.

Net charter consolidation rate slightly decreased 

between 2019 and 2020 (Chart 17).11 The pandemic and 

challenging economic conditions could contribute to 

renewed consolidation and merger activity in the near 

term, particularly for banks already facing significant 

earnings pressure from low interest rates and a potential 

increase in credit losses. 

Throughout 2020, the banking industry demonstrated 

resilience despite continued economic challenges and 

uncertainties relative to the COVID-19 pandemic. The 

next sections of this report explore the specific credit 

and market risks that will continue to challenge the 

banking industry in 2021. 

The Number of Branches Steadily Declined

0

20,000

40,000

60,000

80,000

100,000

Branches

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: FDIC Summary of Deposits. 

Note: Data as of June 30, 2020.

Chart 16

Net Consolidation Rate Declined

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Industry

Community Banks

Net Consolidation Rate 

Percent

Source: FDIC. 

Note: Data as of fourth quarter 2020.

Chart 17