The list of “problem banks” drawn up by the US government last quarter was once again lengthened. The rise in interest rates and the increase in overdue commercial real estate and credit card loans made some banks in trouble.

The US Federal Deposit Insurance Corporation (FDIC) said on Thursday that the number of banks with financial, operational or management issues within its jurisdiction increased by 8, to a total of 52, accounting for 1.1% of the total number of banks regulated by the FDIC. The total assets held by these lenders increased by 12.8 billion US dollars to 66.3 billion US dollars in the last quarter.

Although the number of banks on the FDIC list is still relatively small compared to historical highs, it continues the growing trend that began at the beginning of last year. The FDIC believes that the banking sector remains strong and resilient in general.

Martin Gruenberg, Chairman of the Federal Deposit Insurance Company

According to the FDIC, the list of problematic banks was screened based on a key risk indicator known as CAMELS. The rating scale is 1-5, with 5 being the worst. The FDIC previously stated that the banks on the list scored 4 or 5.

The FDIC said that banks on the list will receive a tailor-made rectification plan and the competent supervisory authority will evaluate the rectification situation.

Overall strength

The FDIC said in its quarterly banking overview report that the 4,587 banks under its jurisdiction are generally in good financial condition. According to the FDIC, the banking sector's net revenue hit the $1 trillion mark for the first time since the FDIC began issuing an overview report.

FDIC director Martin Gruenberg said in a statement that “the banking industry continues to show resilience after experiencing a period of liquidity pressure in early 2023.” He added that the banking sector faces significant risks that could affect credit quality, profits and liquidity. Gruenberg also mentioned concerns about commercial real estate loans.

According to the FDIC, the bank's quarterly net profit fell 44% month-on-month. The agency blamed this mainly on expenses associated with the FDIC's so-called special assessment.

The FDIC currently estimates that the collapse of Silicon Valley Bank and Signature Bank last year caused a loss of 20.4 billion US dollars, which is 25% higher than the estimated 16.3 billion US dollars in November last year.

Unrealized losses

Despite the overall strength of the banking sector, commercial real estate and overdue credit card loans cast a shadow over the outlook for this year.

Gruenberg said that overdue payments for private commercial properties by non-owners reached the highest level since the first few months of 2014, and credit card delinquency rates have never been higher since the third quarter of 2011.

From a more positive perspective, Gruenberg said unrealized losses in the banking sector fell 30% to $478 billion, mainly benefiting from improvements in banks' holdings of mortgage-backed securities. Coupled with the increase in cash balances, there has been an improvement in banking liquidity. The FDIC said the total losses were the lowest since the second quarter of 2022, but they are still above historical levels.

Banks may breathe a sigh of relief in the next few months, as Federal Reserve Chairman Powell said at a Senate hearing that if inflation meets expectations, interest rate cuts can begin sometime this year.

Following the release of the aforementioned quarterly report, Gruenberg told reporters that he expected regulators to revise proposals requiring large banks to hold more capital. Powell said on Wednesday that he expects substantial adjustments to the capital reform and possibly a new proposal.