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Strategic Plans

Banking Industry: Perspective and Outlook

Last Updated: May 21, 2020

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 financial institution failure.  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 also acts as receiver for insured depository institutions (IDIs) that fail and has resolution planning responsibilities (jointly with the Federal Reserve Board) for large and complex financial companies.

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, and to provide depositors with 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 3,668 $2,881,537
OCC 1,247 $11,689,460
FRB 822 $2,671,406
TOTAL 5,737 $17,242,403
Source: Quarterly Banking Profile. Data as of 9/30/2017

In addition, 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 under the U.S. Bankruptcy Code in the event of financial distress.

  • The Receivership Management Program encompasses activities undertaken by the FDIC, in its capacity as receiver, to resolve failed IDIs in the least costly manner to the DIF; maximize net recoveries to the creditors of receiverships; and, under specified circumstances, administer the orderly liquidations of covered financial companies.

Over the next four years, the FDIC will face numerous issues and challenges in each of these major programs due to changing economic conditions, continuing changes in the nature of the financial services industry, expected changes in financial services regulation, and emerging consumer protection issues that affect the financial services industry. 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. 

The United States is in the midst of one of the longest recorded economic expansions. Economic growth has been subdued but sustained since the last recession ended in mid-2009. Household balance sheets have recovered from the financial crisis, as household wealth has increased from rising home prices and stock market valuations. While residential fixed investment remains below pre-crisis levels, business investment has returned to long-term trends. The economic outlook is for continued moderate growth, although downside risks remain.

Banks generally have improved their asset quality, and capital and liquidity ratios.  Although annual loan growth has slowed in recent quarters, all major loan categories continue to grow. Industry-wide profitability (as measured by return on assets) has been trending up, and the majority of banks report year-over-year growth in their quarterly net income. 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 competitive lending conditions continue to pose challenges for many institutions. Some banks have responded to this environment by investing in longer-term or higher-risk assets. In some cases, banks may be entering unfamiliar business lines or offering new products to increase profitability.  For these reason, banking institutions remain vulnerable to interest-rate risk when interest rates eventually normalize to their longer-run levels. Overall, the industry must manage interest-rate risk, liquidity risk, and credit risk carefully to remain on a long-run, sustainable growth path.

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 92 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 46 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 bankers remain concerned about their competitive position vis-à-vis larger non-community banks.
  • Large and Complex Financial Institutions. Although the FDIC is not the primary federal regulator for most large and 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 and other financial institutions that have highly diverse business strategies and complex legal and business structures that make it difficult for the management of these companies to fully understand and manage their risks.  These risks are intertwined among both their insured and uninsured subsidiaries, and the largest and most complex of these companies often have global footprints and interdependent counterparty relationships with one another that increase their complexity and risk.
  • Information Technology and Cybersecurity. Cybersecurity threats continue to pose risk to banks, businesses, consumers, financial markets, and the FDIC.  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 2015 FDIC survey, more than one-quarter of U.S. households do not have an account at an IDI or obtain financial services and products from alternative, nonbank financial firms.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 pursue the challenge of expanding the access of underserved households and communities to the products and services of FDIC-insured institutions.  This requires engagement with both large and small banks across the country as well as with local governments and community leaders to understand business and partnership opportunities and promote financial education.  By helping connect banks and communities in new ways and increasing awareness and use of safe and affordable banking services, the FDIC expects that it can strengthen the country’s 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 will transition into retirement over the next decade, even as the need for employees with advanced technical skills continues to increase.  To address these challenges, the FDIC will develop and implement strategies over the next several years to recruit, train, develop, and maintain a highly skilled and engaged workforce drawn from all segments of U.S. society that embodies at all levels the principles of diversity, inclusion, and workplace excellence.3

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. The survey reported that 7. 0 percent of U.S. households (9.0 million households) had no relationship with a mainstream financial institution and that another 19.9 percent of U.S. households (24.5 million households) were underbanked (“underbanked” households were defined as those that had a bank account but had also obtained during the 12-month period prior to the survey financial services or products from alternative financial services providers outside of the banking system).

3 The FDIC has issued (and updates annually) a Diversity and Inclusion Strategic Plan that guides its effort in this area.