Fed releases Oversight and Regulation Report

The Fed has published the May 2023 issue of its Supervision and Regulation Report. The Fed noted in the report that recent bank failures revealed that the distribution of funding sources and interest rate risks were mismanaged. The US Federal Reserve (Fed) has published the May 2023 issue of its "Supervision and Regulation Report" regarding banking conditions in the country and the Fed's supervision and regulation activities. The report emphasized that the US banking system is robust and resilient with strong capital and liquidity, and that the recent stress in the sector shows that the Fed should be careful in assessing and responding to risks. The report, which pointed out that the recent bankruptcies of three banks in the country also revealed the distribution of funding sources and mismanagement of interest rate risks, reminded that the fair values of investment securities have decreased significantly as interest rates have increased. The report noted that deposit costs have also increased from low levels to high levels and that firms have turned to borrowing to meet their funding needs, and that default rates for some credit segments have increased from the low levels of recent years. The report noted that banks increased their provisions for credit losses in anticipation of a deterioration in asset quality, and that within this scope, supervisors redoubled their efforts to assess banks’ preparedness for credit, liquidity, and interest rate risk. The report noted that Fed supervisors had begun preparing for the increasing possibility of a more challenging economic environment for banks over the past year, and that supervisors focused on assessing firms’ ability to manage liquidity-related risks. Additional reviews conducted to assess interest rate risks The report noted that supervisors also undertook additional reviews to assess interest rate risks and their impact on firms’ funding options, and that declines in the fair value of investment securities were putting pressure on liquidity and capital at some banks, necessitating updates to their emergency financing plans. The report noted that Fed supervisors increased their efforts to assess banks’ exposure to credit risk, particularly focusing on regional and community banks’ commercial real estate loans. The report provides an overview of the financial condition of the banking sector and provides information on the Fed's latest regulatory policy efforts and current supervisory programs and priorities.