ECONOMIC UNCERTAINTY, RISING INTEREST RATES CHALLENGE BANKS By Carl White, Senior Vice President of Supervision, Credit and Learning Division, Federal Reserve Bank of St. Louis The U.S. banking system is sound and resilient, with strong capital and liquidity, according to the latest report on bank supervision and regulation released in May by the Federal Reserve Board of Governors.1 Nevertheless, bank supervisors are actively monitoring risks associated with credit, liquidity and interest rates. These risks have risen in 2023 because of prevailing economic conditions and uncertainty about the future path of the economy. The banking system was challenged earlier this year by the failures of three large banks (Silicon Valley Bank, Signature Bank and First Republic Bank). Even though those failures were largely triggered by concentrated funding sources and poor interest rate risk management at the institutions themselves, fear of contagion led to an anxious couple of months for depositors, investors and regulators. Of greater concern for the industry have been the effects of rising interest rates on the cost of deposits and other funding (causing costs to rise) and the fair value of investments in fixed-rate securities (causing the value to decline). Loan delinquency rates in some loan categories have begun to inch up, albeit from very low levels, leading many banks to increase the funds set aside to cover future credit losses. Higher interest rates when loans reprice means some borrowers may be challenged to make loan payments. 1. The semiannual report covers banking conditions, as well as regulatory and supervisory developments for the institutions under the Fed’s supervisory umbrella. https://www.federalreserve.gov/ publications/files/202305-supervision-andregulation-report.pdf 26 | The Show-Me Banker Magazine
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