The Federal Deposit Insurance Corp.’s latest quarterly banking industry report hints at where risks lie if additional pressures come to bear on financial services firms — particularly those that don’t have deposit insurance in the mix.
In the tables and discussions that give a read-across on risk — in this case, the risks tied to the proverbial money in the bank — there is granularity on insured and uninsured deposits.
Insured deposits refer to the deposit accounts at FDIC-insured banks that are protected in the event of a bank failure, where the backstop is $250,000 per depositor (across a variety of ownership categories).
Across the industry, deposits were lower overall. The FDIC noted in its report that insured deposits decreased $96 billion (0.9%) from the first quarter. Uninsured deposits decreased $50.4 billion (0.7%).
“Banks with assets greater than $250 billion, in aggregate, reported lower uninsured deposits in the second quarter, while banks with assets less than $250 billion, in aggregate, reported higher uninsured deposits,” the FDIC said.
In the meantime, lending activity picked up. Loan balances were up “modestly” from the most recent quarter and from a year ago, as total loans gained 1% from the first quarter, inching ahead by $125.8 billion, per the report.
Loans to non-depository financial institutions (NDFIs) surged by 9.6%, or $76 billion, and “much” of the growth came as certain loans were reclassified, the report said. Generally speaking, NDFIs are classified as everything from private equity to private credit to peer-to-peer lenders.
The rise of lending to NFDIs, as recently as the end of last year and as detailed in a request for comment, has attracted more scrutiny of regulators, including the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the FDIC, seeking input on revising and expanding the reporting on loans held by the NDFIs, which now top $786 billion.
Banks with $10 billion or more in total assets would report the loans to mortgage credit, business credit, and consumer credit firms. Modifications to the proposal have included more reporting on delinquencies and foreign exposure.
The risks have been highlighted in recent months, and the risks transcend borders. As reported over the summer, Financial Stability Board (FSB) Chair Klaas Knot said recent “incidents of market stress and liquidity strains” have been tied to nonbank financial firms (also known as shadow banks, which could include the finance firms mentioned above).
The Federal Reserve estimated that the credit line commitments to nonbanks stand at about $1.5 trillion, with investments ranging from mortgage-backed securities firms to private equity firms to warehouse financing to asset-backed securities firms.
“The common view is that banks and NBFIs operate in parallel, performing different activities, or they act as substitutes of each other, performing substantially similar activities, with banks inside and NBFIs outside the perimeter of prudential regulation,” the Fed said in the June blog post “Banks and Nonbanks Are Not Separate, but Interwoven.” “We argue instead that NBFI and bank activities and risks are so interwoven that they are better described as having transformed over time rather than as being unrelated or having simply migrated from banks to NBFIs.”
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