Large banks mitigate financial uncertainties; the FRB denotes “work to do” to meet supervisory expectations for governance and controls
KPMG Insight. The FRB’s reports highlight that, although the banking industry remains financially sound with strong capital levels, institutions are beginning to take steps to protect against weaker economic conditions and future uncertainties, including continued increases to loan loss reserves. Areas that may be vulnerable to evolving economic conditions and subject to heightened oversight will include exposures to crypto and digital assets and leveraged positions, changes in liquidity and capital, the stability of customer deposits, investment securities valuations, and bank and customer borrowing costs. The FRB highlights that many large financial institutions have “work to do” to meet supervisory expectations for “governance and controls” in areas such as operational resilience, information technology, third-party risk management, and BSA/AML compliance. The agency notes firms are expected to make the needed investments in systems and risk management to ensure adequate controls.
The Federal Reserve Board (FRB) has published two semiannual reports: 1) the Financial Stability Report and 2) the Supervision & Regulation Report.
The Financial Stability Report presents FRB’s current assessment of the stability of the overall U.S. financial system, while the Supervision & Regulation Report highlights FRB’s assessment of banking system conditions, as well as regulatory and supervisory developments in 2022 and priorities for 2023.
The reports are outlined in detail below.
FRB’s Financial Stability Report distinguishes between shocks to, and vulnerabilities of, the financial system, and primarily focuses on vulnerabilities across four categories, as well as several near-term risks to the financial system, each of which is highlighted below.
Overview of financial system vulnerabilities
Borrowing by Businesses and Households
Leverage within the Financial Sector
Near-Term Risks to the Financial System
The FRB highlights possible interactions between the existing vulnerabilities and these near-term risks:
FRB’s Supervision and Regulation Report outlines its current assessment of banking system conditions, and highlights regulatory and supervisory developments over the year along with priorities for 2023. Each are briefly outlined below.
Banking System Conditions
2023 Supervisory Priorities