Challenges abound for the banking industry, but, overall, bank performance remains solid, say Cleveland Fed bank examiners and regional bankers

The banking industry remains strong, but the operating environment is extremely challenging, and an uptick in provisions for credit losses suggests that bankers expect asset quality to deteriorate in the near term, say banking supervisors with the Federal Reserve Bank of Cleveland.

Such provisions are increasing primarily because of concerns related to the energy sector, according to the banking supervisors. That said, banks’ exposure to energy assets relative to overall bank loan portfolios is very small both nationwide and in the Fourth Federal Reserve District, notes Stephen Ong, a Cleveland Fed vice president who oversees risk supervision and financial stability.

“Otherwise, there’s not a particular industry or portfolio that we’re concerned about,” says Jenni Frazer, a Cleveland Fed vice president overseeing the supervision of large banking organizations with more than $50 billion in assets. “Even on the real estate side, it’s a longer trend. We’re seeing relaxation of underwriting, but it’s not translating into losses yet. Despite some trends, the fundamentals are still very solid.”

Among the challenges facing bankers are compressed net interest margins and nonbank competition for what’s been modest loan demand as well as the needs to mitigate cybersecurity risks and to be mindful of geopolitical risks, such as the extension of credit to entities doing business in countries experiencing downturns and negative interest rates.

For more insights, read State of Banking, 2016 in Forefront and download the related infographic.

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.218.1892