The Federal Deposit Insurance Corporation (FDIC) was established in 1933 with a core mission: to maintain stability and public confidence in the nation’s financial system. The just published 2025 FDIC Risk Review provides an overview of the key market and credit risks that affected banks throughout 2024.
While the banking industry demonstrated overall resilience in 2024, with net income well above pre-pandemic levels, favorable asset quality metrics, stable liquidity, and increased capital, the report highlights several areas of potential risk for 2025 and beyond. These risks are broadly categorized into Market Risks and Credit Risks.
Primary Risks for 2025:
- Market Risks:
- Interest Rate Uncertainty: Although shorter-term interest rates declined at the end of 2024, longer-term rates remained elevated for much of the year. Interest rate uncertainty may be an ongoing challenge for banks overall.
- Elevated Unrealized Losses on Securities: Unrealized losses on bank securities portfolios remained elevated at $482.4 billion in the fourth quarter of 2024. This is because bank securities values are more closely linked to longer-term interest rates, which stayed high. These losses represent a drag on future earnings and present immediate earnings risk should securities need to be sold or a bank chooses to restructure its balance sheet.
- Credit Risks:
- Commercial Real Estate (CRE): CRE conditions were uneven in 2024, and office properties are expected to continue to underperform in 2025. Rising operating costs (including insurance and debt service), elevated vacancy rates, and slower rent growth negatively impacted property-level cash flows and borrower repayment capacity, particularly for office properties. A significant volume of CRE loans is scheduled to mature in 2025. These maturing loans could face difficulties with interest rates still well above pre-2023 levels. While CRE asset quality metrics (Past-Due and Nonaccrual – PDNA, net charge-offs) worsened in 2024, they remained far below Great Recession levels. Deterioration was more pronounced among larger banks (> $100 billion in assets), but community banks and noncommunity banks under $100 billion maintain the highest exposure levels to CRE loans. CRE loan quality and collateral values may continue to be a source of risk for banks, and interest rates may continue to affect the CRE sector, including bank CRE loan performance.
- Non-Depository Financial Institution (NDFI) Lending and Private Credit: While bank lending to NDFIs has historically shown relatively low credit risk, several trends suggest potential vulnerabilities in the market. These include the potential for looser underwriting standards due to increased competition, the difficulty banks face in assessing the credit quality of loans originated by private credit firms, and the reliance of some NDFIs on less-stable funding sources, which could lead to liquidity stress and increased demands on banks. The growing use of capital call facilities by NDFIs for leveraging positions also increases the bank’s risk. A sudden decline in credit quality of these loans could stress a bank’s regulatory capital ratios. The opacity of the private credit market impairs measuring its interactions with banks and the associated risk exposures. Some signs of stress were present in the private credit market in 2024, such as a rising share of payment-in-kind (PIK) income for Business Development Companies, suggesting borrower liquidity constraints.
- Consumer Lending: Household finances showed signs of weakening in 2024 compared to 2023, with slower real income growth, a falling savings rate, and rising debt burdens (though still near historic lows). Consumer loan asset quality worsened in 2024, with aggregate PDNA rates increasing for total consumer loans, auto loans, and credit card loans. PDNA rates for credit card and auto loans were above their pre-pandemic levels by the end of 2024. Deterioration was more pronounced among community banks.
- Agriculture Lending: Agricultural conditions softened in 2024 for the second consecutive year, driven by weakness in the crop sector. This led to a decline in working capital and increased farmers’ reliance on bank loans, resulting in tighter liquidity positions for farm banks. While agricultural loan quality only deteriorated modestly in 2024, projected losses for 2025, primarily on corn and soybeans, could impair farmers’ ability to repay loans, posing credit risks to banks. Sustained losses could continue to drain working capital and strain cash flows, and could potentially put downward pressure on farmland and machinery values, which affects collateral. Further credit weakness may emerge in early 2025 during the annual loan renewal process.
- Small Business Lending: Small businesses faced tighter financing conditions and high inflation in 2024. While asset quality for community bank Commercial and Industrial (C&I) loans (a proxy for small business loans) remained relatively sound, uncertain small business conditions may be a source of credit risk.
In summary, banks should remain attentive to the ongoing challenges from interest rate dynamics (especially impacting securities portfolios and CRE refinancing), potential vulnerabilities in NDFI/Private Credit lending, continued deterioration in certain consumer loan segments, and the emerging credit risks in agriculture and potential risks in small business lending, with particular attention paid to CRE conditions and maturities in 2025.
