The FDIC and the Banking Industry:
Perspective and Outlook

Introduction

Congress created the FDIC in the Banking Act of 1933 to maintain stability and public confidence in the nation’s banking system. The statute provided a federal government guarantee of deposits in U.S. depository institutions so that depositors’ funds, within certain limits, would be safe and available to them in the event of a failure of an insured depository institution (IDI). The FDIC acts as receiver for IDIs that fail, and has resolution planning responsibilities for large, complex financial institutions. In addition to its role as insurer, the FDIC is the primary federal regulator of federally insured state-chartered banks that are not members of the Federal Reserve System.

The FDIC carries out its mission through three major programs: insurance, supervision, and receivership management.

The Insurance Program encompasses the activities undertaken by the FDIC to administer the Deposit Insurance Fund (DIF), which is funded through assessments on IDIs as well as investment income, to resolve failed IDIs in the manner least costly to the DIF, and to provide depositors with timely access to their insured funds when an IDI fails.

The Supervision Program encompasses the activities undertaken by the FDIC to promote safe and sound operations and compliance with fair lending, consumer protection, and other applicable statutes and regulations by IDIs for which the FDIC is the primary federal regulator (in cooperation with state banking agencies). The FDIC also has backup supervisory responsibility for other IDIs for which the Board of Governors of the Federal Reserve System (FRB) and the Office of the Comptroller of the Currency (OCC) are the primary federal regulators.

Primary Federal Regulator	Number of Institutions	Total Assets (Dollars in Millions)
FDIC	3,209	$4,004,570
OCC	1042	$14,875,388
FRB	727	$3,684,242
TOTAL	4978	$22,564,200
Source: Quarterly Banking Profile. Data as of 3/31/2021

 

The FDIC is responsible for monitoring and assessing risks posed by, and planning for the resolution of, large, complex financial institutions (LCFIs) under authority derived from the Federal Deposit Insurance Act (FDI Act) and the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). . As part of this work, the FDIC and the FRB have joint responsibility for reviewing resolution plans submitted by large bank holding companies and designated nonbank financial companies that demonstrate how they would be resolved in a rapid and orderly manner in the event of financial distress; and, under specified circumstances, administer the orderly liquidations of covered financial companies.

The Receivership Management Program encompasses activities undertaken by the FDIC, in its capacity as receiver, to maximize net recoveries to the creditors of receiverships.

Over the next four years, the FDIC will face numerous issues and challenges in each of these major programs associated with a post-pandemic economy and related impacts to the financial services industry and consumer and business preferences. Some of the major issues and challenges are addressed in more detail below

The Impact of the Economy

The performance of the economy directly affects the performance of individual financial institutions and the overall banking industry. Interest rates, inflation, unemployment, the business cycle, and shocks to specific sectors like agriculture, energy, housing, or commercial real estate all influence lending and funding strategies of IDIs. Economic and financial conditions abroad also have an impact on the U.S. economy and on the performance of banks.

As of first quarter 2021, the United States continued to recover from a deep recession that occurred in early 2020 caused by the Coronavirus Disease 2019 (COVID-19) pandemic. Significant government stimulus for individuals and small businesses in 2020 and early 2021 helped support the economy. In early 2021, restrictions on economic activity eased and vaccination rates improved, which further contributed to stronger economic growth. Consumer spending strengthened. In aggregate, household balance sheets remained resilient and household wealth increased from rising home prices and stock market valuations. Business investment continued to recover and returned to pre-pandemic levels. Overall, the economic outlook is for continued moderate growth, although uncertainty remains, as the economy begins to reopen and businesses and individuals adjust to changes as the pandemic evolves.

Banks generally entered this period of disruption with strong asset quality and capital and liquidity ratios, and were able to serve as a source of strength for the economy, individuals and small businesses throughout the global health epidemic.

Although loan balances contracted between the first quarter 2020 and the first quarter 2021, the first such annual contraction since the third quarter 2011, financial institutions supported the economic recovery with lending through the first and second rounds of the Paycheck Protection Program and by working with impacted borrowers. The decline in loan volume and the persistent low interest rate environment caused contraction in the average net interest margin, which set three record lows over the past year. In contrast, deposits grew at unprecedented rates over the same period.

Despite these challenges, the banking industry remains resilient. Strong capital and liquidity levels support lending and help protect against potential losses. Industry-wide profitability (as measured by return on assets) remains strong. The number of problem institutions has fallen dramatically from the post-crisis high and is at its lowest level since 2008.

While the banking industry continues to perform well, the interest-rate environment and economic uncertainty continue to pose challenges for many institutions. Overall, the industry must manage interest-rate risk, liquidity risk, and credit risk carefully to remain on a long-term, sustainable growth path.

The United States experienced the sharpest economic contraction in the post-WWII period in early 2020 with the sudden onset of the COVID-19 pandemic, and the unemployment rate reached double-digit levels. The resulting recession ended a period of subdued but sustained economic growth since the last recession ended in mid-2009. The subsequent labor market weakness, business closures, and lower interest rates all posed challenges to banks. Conditions improved considerably in 2021, helped by expansive fiscal and monetary policy implemented in 2020 and 2021 to support businesses and consumers, the rollout of vaccines, and reduced pandemic-related restrictions in economic activity. However, this economic environment has posed several key challenges for the banking industry. The economic outlook remains uncertain and depends on the path of the pandemic as well as the outlook for fiscal and monetary policy in their effects on economic activity and interest rates.

As of first quarter 2021, banks generally maintained strong asset quality, capital, and liquidity positions. Annual loan growth slowed in recent quarters, with all major loan categories contracting. Industry-wide profitability (as measured by the return on assets ratio) has been trending up, and the majority of banks report year-over-year growth in quarterly net income. The growth in net income is due to reductions in provisions for credit losses. The number of problem institutions remains near the lowest level since 2008.

Other Major Strategic Challenges

In addition to the challenges posed by the economy, the FDIC expects to face other challenges that will shape its priorities over the next four years.

Future of Community Banking.  The FDIC is the primary federal regulator for most community banks, which make up 91 percent of FDIC-insured bank and thrift charters (up from 87 percent in 1984); hold a majority of deposits in rural and “micropolitan” counties (those with populations up to 50,000 people), including more than 600 U.S. counties where community banks hold 100 percent of all bank deposits; and account for 38 percent of the industry’s small loans to farms and businesses.¹   Despite their long-term resilience and continuing importance as a source of credit to the vital small business sector, community banks continue to face competitive challenges from non-community banks and non-bank financial technology competitors.

Regional Banks  Regional banks have continued to grow in number, assets, and complexity. FDIC supervises a growing percentage of the regional bank universe, as community banks continue to merge and grow organically. FDIC also has both insurance risk monitoring and back-up supervisory responsibilities for the remaining regional banks. Similar to community bankers, regional banks face competitive challenges from large, complex financial institutions and non-bank technology competitors. An increasing number of regional banks have less traditional business models, including for example monoline operations, concentrated lending or funding operations, nationwide lending platforms, and other niche activities

Large and Complex Financial Institutions (LCFIs). Although the FDIC is not the primary federal regulator for most large, complex IDIs, it has both insurance and back-up supervisory responsibilities for those institutions and acts as receiver for those that fail. The assets within the banking industry are concentrated today in a small number of large, complex banks that have highly diverse business strategies and complex legal and business structures that necessitate ongoing monitoring of their risks. These risks are intertwined among both their insured and uninsured subsidiaries, and the largest and most complex of these companies have significant international operations and interdependent counterparty relationships with one another that increase their complexity and risk.

Innovation, Information Technology and Cybersecurity. Some banks have responded to the previously discussed economic challenges by investing in innovative technologies to boost profitability through reduced overhead expenses. Others are offering new services to their customers by partnering with technology companies on the front lines of innovation, or by adopting new technologies themselves. Cybersecurity threats continue to pose risks to banks, businesses, consumers, financial markets, and the FDIC. Some institutions are leveraging innovative technology solutions to enhance their resilience to a cybersecurity attack. In addition to addressing cybersecurity threats internally, the FDIC works collaboratively with other federal and state agencies to help ensure that FDIC-insured institutions also take appropriate steps to address this risk.

Economic Inclusion. Based on a 2019 FDIC survey, 5.4 percent of U.S. households did not have an account at an IDI.²

The FDIC recognizes that public confidence in the banking system is strengthened when households effectively use the mainstream banking system to deposit funds securely, conduct basic financial transactions, accumulate savings, and access credit on safe and affordable terms. The FDIC will continue to promote greater economic inclusion and financial well-being by helping more underserved households and communities benefit from the products and services of FDIC-insured institutions. The FDIC’s #GetBanked initiative encourages consumers to start a banking relationship. The FDIC also communicates directly with banks to promote the importance of offering safe and affordable bank accounts, such as checkless checking accounts. FDIC’s Money Smart program provides people with practical knowledge, skills-building opportunities, and resources to manage finances with confidence.

This work requires engagement with banks of all sizes, as well as with local governments and community leaders. FDIC facilitates business and partnership opportunities and promotes financial education. By helping to connect banks and communities in new ways, and increasing awareness and use of affordable banking services, the FDIC strengthens the banking system and communities nationwide.

Workforce Management and Development. The FDIC depends upon the talents and skills of its employees to accomplish its mission. Much of the FDIC’s current workforce is eligible to retire over the next decade, creating an opportunity to transform both the workforce and the manner in which the FDIC meets its mission. To address this workplace reality, the FDIC will continue to enhance its data collection and analysis efforts to inform development and implementation of succession management strategies over the next several years. These efforts will include specific recruitment and development strategies to support a high performing workforce that reflects the communities we serve by optimizing experiences throughout an employee’s career. These actions will ensure that the FDIC workplace is inclusive, free from unlawful discrimination, and provides equal opportunity and accessibility in all its employment and business activities. The FDIC has issued a 2021-2023 Diversity, Equity, and Inclusion Strategic Plan that guides its efforts. Strategies also include the modernization of learning and development by transforming the FDIC’s use of virtual learning, enhancing learning technology, and modernizing the training center.

1. Based on the definition of community banks in the FDIC Community Banking Study, 2012.
2. 2015 National Survey of Unbanked and Underbanked Households, October 2016, October 2020. The survey found that 5.4 percent of U.S. households (7.1 million households) did not have a bank or credit union account in 2019.