Overall, U.S. banks are in good condition with solid earnings, sound asset quality and regulatory capital levels above required minimums. This assessment comes from the Federal Reserve Board of Governors in its semiannual Supervision and Regulation Report published in November. The report covers banking system conditions in the first half of 2024, as well as regulatory and supervisory developments for the institutions under the Fed’s supervisory umbrella.

Supervision by the Numbers

Although the Fed has supervisory authority over several large banks and all the nation’s bank holding companies, most banks under its supervisory umbrella are community banks – banks with less than $10 billion in assets. Of the 705 state member banks the Fed supervised at midyear 2024, 92% (650 banks) met that community bank threshold and were part of the Fed’s Community Banking Organization portfolio. The next largest group – consisting of 42 state member banks – made up the Regional Banking Organization portfolio; banks in this group have total assets of $10 billion to $100 billion.

At the St. Louis Fed, all our supervised banks fall into the Community or Regional banking organization portfolios. Currently, we have direct supervisory responsibility for 130 state member banks across those two portfolios. That represents nearly one-fifth of the Fed System’s supervised banks. In terms of assets under supervision, the regional banks have a combined $256.1 billion, or about 70% of the total. The combined assets of the community banks total $108.2 billion.

An Eye on Credit

While banking fundamentals are currently strong, supervisors are keeping an eye on credit quality. The level of nonperforming loans remains low, and the ratio of nonperforming loans to total loans is below the 1% benchmark. However, delinquency rates for certain categories of consumer and commercial real estate loans have risen. In the consumer loan segment, supervisors are watching credit card and auto loan delinquencies, both of which have ticked up in recent quarters; the auto loan delinquency rate was just below its five-year high in the second quarter.

The nonperforming ratio for CRE loans is at its highest level since 2014, primarily driven by loans for office buildings in major cities. At large banks, the nonperforming loan rate for office loans hit 11% in the second quarter. And while the rate didn’t increase as much at small banks, they tend to hold a larger percentage of their loan portfolios in CRE loans, elevating the stakes for CRE market weakness. Office vacancy rates climbed during the COVID-19 pandemic and, in many cases, have remained elevated as many people continue to work from home.

Supervisors are closely monitoring underwriting standards, loan quality and credit loss reserve levels across the entirety of banks’ loan portfolios.

Other Supervision Priorities

Assessing banks’ preparedness for managing liquidity risk remains high on the Fed’s priority list. Banks are expected to have prudent liquidity risk-management practices and to regularly test their ability to access multiple sources of contingent funding, such as Federal Home Loan Bank advances and the Federal Reserve’s discount window.

Cybersecurity is another supervisory priority. Examiners are specifically looking for adequate risk management, governance and controls to protect banks’ data and operations against cyber threats. That assessment extends to certain services performed on behalf of banks by their external service providers.