FDIC Risk Review
By: Stephen Rountree
FDIC Risk Review
During October 2019, the FDIC issued its 2019 Risk Review. The document highlights several areas the Regulator sees increased as key risks, and they include: Agriculture, Commercial Real Estate, Housing, and Interest Rate Risk. The Risk Review could be viewed as future regulatory ‘hot buttons’ within examinations.
A reading of the publication, as well as historical regulatory publications, seems to indicate higher concentration levels within loan types, and continued expanding concentrations, could result in increased regulatory scrutiny. Highlights from the review follow.
During October 2019, the FDIC issued its 2019 Risk Review. The document highlights several areas the Regulator sees increased as key risks, and they include: Agriculture, Commercial Real Estate, Housing, and Interest Rate Risk. The Risk Review could be viewed as future regulatory ‘hot buttons’ within examinations.
A reading of the publication, as well as historical regulatory publications, seems to indicate higher concentration levels within loan types, and continued expanding concentrations, could result in increased regulatory scrutiny. Highlights from the review follow.
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Agriculture
- The agricultural economy is now in its sixth year of low commodity prices and farm incomes, and agricultural exports are under pressure from trade uncertainties and slowing global growth.
- Strong farmland equity has enabled farmers to restructure loans to manage operating losses and replenish working capital, keeping reported credit problems low at insured institutions.
- Farm bank asset quality and liquidity measures are lower in 2018 than recent years but remain stronger than the levels reported during the 1980s farm bank crisis.
- The agricultural economy is now in its sixth year of low commodity prices and farm incomes, and agricultural exports are under pressure from trade uncertainties and slowing global growth.
- Strong farmland equity has enabled farmers to restructure loans to manage operating losses and replenish working capital, keeping reported credit problems low at insured institutions.
- Farm bank asset quality and liquidity measures are lower in 2018 than recent years but remain stronger than the levels reported during the 1980s farm bank crisis.
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Commercial Real Estate
- Commercial real estate (CRE) market conditions remain favorable as the economic cycle matures.
- Modest oversupply concerns are emerging for multifamily and industrial CRE property types, while retail CRE is facing long-term challenges related to shifts in consumer shopping behavior.
- FDIC-insured institutions have grown their CRE loan portfolios, primarily with loans for existing properties rather than loans for construction and development projects.
- CRE loan performance metrics at FDIC-insured institutions are strong, although institutions with CRE concentrations may be vulnerable to economic changes.
- Competition for quality CRE loans poses challenges for institutions operating in the CRE sector.
- Commercial real estate (CRE) market conditions remain favorable as the economic cycle matures.
- Modest oversupply concerns are emerging for multifamily and industrial CRE property types, while retail CRE is facing long-term challenges related to shifts in consumer shopping behavior.
- FDIC-insured institutions have grown their CRE loan portfolios, primarily with loans for existing properties rather than loans for construction and development projects.
- CRE loan performance metrics at FDIC-insured institutions are strong, although institutions with CRE concentrations may be vulnerable to economic changes.
- Competition for quality CRE loans poses challenges for institutions operating in the CRE sector.
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Housing
- Signs of a slowdown in sales are emerging in the housing market even as house prices continue to rise across most of the nation.
- Affordability is a growing concern as income growth lags the rise in house prices and mortgage payments.
- Among FDIC-insured institutions, the condition of the residential mortgage portfolio is favorable, but some banks report significant loan concentration levels and increased competition
- Signs of a slowdown in sales are emerging in the housing market even as house prices continue to rise across most of the nation.
- Affordability is a growing concern as income growth lags the rise in house prices and mortgage payments.
- Among FDIC-insured institutions, the condition of the residential mortgage portfolio is favorable, but some banks report significant loan concentration levels and increased competition
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Interest Rate Risk
- Rising interest rates and competitive pressures are headwinds to deposit growth.
- Rising rates and deposit competition have begun pushing deposit costs higher and are affecting the mix of deposits, particularly at non-community banks.
- Most banks continue to report net interest margin growth, but banks with rising funding costs and a high proportion of long-term assets may face near-term margin pressure.
- Rising interest rates and competitive pressures are headwinds to deposit growth.
- Rising rates and deposit competition have begun pushing deposit costs higher and are affecting the mix of deposits, particularly at non-community banks.
- Most banks continue to report net interest margin growth, but banks with rising funding costs and a high proportion of long-term assets may face near-term margin pressure.