While higher interest rates have contributed to recent bank failures, high capital levels and moderate risk exposures mean that a large majority of US banks are resilient to potential stress from higher rates. the Federal Reserve said in its latest report. financial stability report released today.
The semiannual report is the first the Fed has issued since the bankruptcies. He noted that some banks experienced significant funding stress after the closures of Silicon Valley Bank and Signature Bank in March, but credited federal actions with reducing those stresses. “In general, domestic banks have ample liquidity and limited reliance on short-term wholesale funding,” the report says.
As interest rates rose, deposit outflows increased as higher-paying deposit alternatives became more attractive to businesses and households, according to the report. Deposits declined in the fourth quarter of 2022 at an annual rate of 7%, with outflows rising slightly in January and February ahead of the banking sector stress in March. As a result, some banks increased their reliance on wholesale funding sources, although banks’ overall reliance on short-term wholesale funding remained near historically low levels. The report also noted that the overall vulnerability of banks to future credit losses appeared moderate, particularly for banks with sizeable exposures to commercial real estate. Still, “bank profitability was below its 2021 level but close to its pre-pandemic average.”