Hoosier Banker 47 1 Another factor influencing recent provisioning, especially at larger banks, is the introduction of the Current Expected Credit Losses accounting methodology. See “The CECL Model: Accounting Changes Coming for Banks” at: stlouisfed.org/on-the-economy/2019/august/cecl-model-accounting-changes-coming-banks 2 Banks are subject to four regulatory capital requirements. The minimum tier 1 leverage ratio requirement is 5%. Community banks – those with average assets of less than $10 billion – have the option of complying with one standard rather than four. That standard is called the community bank leverage ratio (CBLR). Provided they meet other requirements, community banks that maintain a CBLR in excess of 9% are considered adequately capitalized for regulatory purposes. During the pandemic, the standard was temporarily reduced to 8%. A version of this article first appeared in the On the Economy blog, a publication of the Federal Reserve Bank of St. Louis. ratio peaked much earlier in 2020. These results stand in stark contrast to the high peak delinquency rates commercial banks experienced following the Great Recession, when the nonperforming loan ratio hit 5.58% for all U.S. banks and peaked between 2.52% and 4.65% in Eighth District states. At the national and Eighth District state levels, banks remain well-capitalized. Although the average Tier 1 leverage ratio declined at the national level and in all Eighth District states between the first quarter of 2020 and the first quarter of 2021, these averages remain above regulatory minimums.2 Some of this decline can be attributed to the previously mentioned influx of deposits, which led to excess liquidity and larger balance sheets. Looking Ahead While banks have weathered the pandemic fairly well, challenges remain. The economic recovery may be uneven, and it may be too soon for problem loans in some sectors to have emerged. A permanent change to more remote work may dampen commercial real estate Bank Group 2019:Q4 2020:Q1 2020:Q4 2021:Q1 All U.S. 1.30% 0.38% 0.71% 1.38% Arkansas 1.49% 0.58% 1.18% 1.68% Illinois 1.11% 0.73% 0.84% 1.18% Indiana 1.32% 1.00% 1.29% 1.49% Kentucky 1.25% 1.06% 1.19% 1.39% Mississippi 1.20% 0.09% 0.68% 1.31% Missouri 1.38% 1.02% 1.32% 1.38% Tennessee 1.27% 0.64% 1.21% 1.34% Bank Group 2019:Q4 2020:Q1 2020:Q4 2021:Q1 All U.S. 0.91% 0.92% 1.19% 1.14% Arkansas 0.65% 0.75% 0.72% 0.67% Illinois 0.73% 0.80% 0.81% 0.77% Indiana 0.55% 0.63% 0.67% 0.64% Kentucky 0.77% 0.79% 0.72% 0.70% Mississippi 0.95% 1.02% 0.85% 0.78% Missouri 0.50% 0.55% 0.52% 0.48% Tennessee 0.63% 0.65% 0.70% 0.69% NONPERFORMING LOAN RATIO FOR U.S. COMMERCIAL BANKS: U.S. AND EIGHTH DISTRICT STATE LEVELS SOURCE: Reports of Condition and Income for Insured Commercial Banks (Call Reports). RETURN ON AVERAGE ASSETS FOR U.S. COMMERCIAL BANKS: U.S. AND EIGHTH DISTRICT STATE LEVELS SOURCE: Reports of Condition and Income for Insured Commercial Banks (Call Reports). Bank Group 2019:Q4 2020:Q1 2020:Q4 2021:Q1 All U.S. 1.30% 0.38% 0.71% 1.38% Arkansas 1.49% 0.58% 1.18% 1.68% Illinois 1.11% 0.73% 0.84% 1.18% Indiana 1.32% 1.00% 1.29% 1.49% Kentucky 1.25% 1.06% 1.19% 1.39% Mississippi 1.20% 0.09% 0.68% 1.31% Missouri 1.38% 1.02% 1.32% 1.38% Tennessee 1.27% 0.64% 1.21% 1.34% Bank Group 2019:Q4 2020:Q1 2020:Q4 2021:Q1 All U.S. 0.91% 0.92% 1.19% 1.14% Arkansas 0.65% 0.75% 0.72% 0.67% Illinois 0.73% 0.80% 0.81% 0.77% Indiana 0.55% 0.63% 0.67% 0.64% Kentucky 0.77% 0.79% 0.72% 0.70% Mississippi 0.95% 1.02% 0.85% 0.78% Missouri 0.50% 0.55% 0.52% 0.48% Tennessee 0.63% 0.65% 0.70% 0.69% lending, the bread and butter of many community banks. Longer term, the continued steady erosion in net interest margins places additional pressure on banks to raise noninterest sources of income – by expanding fee-generating business lines, for example – and to reduce expenses, all while making continued investments in new technology to remain competitive. HB
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