INSIGHTi

COVID-19-Related Impact on the Banking
Industry: Conditions in the Second Quarter
2021
October 13, 2021
Bank regulation is designed to allow banks to withstand some amount of unexpected losses. Some
observers have worried that the economic ramifications of the Coronavirus Disease 2019 (COVID-19)
pandemic could result in enough borrowers missing loan payments to cause distress for banks. This
Insight presents bank industry statistics through the second quarter 2021 and examines how the pandemic
might be affecting the industry.
Background
Economic downturns jeopardize bank income as the likelihood of losses from missed payments increases,
ultimately reducing bank profitability. Meanwhile, bank liabilities—the deposits they hold and the debt
they owe—obligate banks to make funds available to depositors and creditors. If borrower repayments
decline enough, a bank’s ability to meet its obligations could become impaired, potentially causing it to
fail. In contrast, bank capital—largely equity stock and retained profits from earlier periods—enables a
bank to absorb a certain amount of losses without failing. For this reason, bank regulators require banks to
hold certain amounts of capital (in addition to subjecting them to a variety of safety and soundness
regulations) to avoid failures.
Certain effects of, and bank responses to, economic downturns—such as reduced income and increased
credit loss reserves (discussed below)—occur shortly after the onset of economic deterioration. Other
effects—such as increased loan delinquency, incurred losses, and reduced capital value—occur after a
longer lag. (See CRS Insight IN11501, COVID-19 Impact on the Banking Industry: Lag Between
Recession and Bank Distress.) Currently, the bank industry appears to be holding up well. However, as
the pandemic continues to affect the economy and the option to request loan forbearances expired on
September 30, 2021, signs of stress may begin to emerge.
The Federal Deposit Insurance Corporation (FDIC) releases comprehensive data on bank conditions and
quarterly income. The Quarterly Banking Profile: Second Quarter 2021 reports aggregate data from all
4,951 FDIC-insured institutions as of June 30, 2021.
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CRS INSIGHT
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Income and Loss Reserves
The profit for the banking industry in the first six months of 2021 was $146.7 billion (see Table 1), nearly
a 300% increase from the first six months of 2020. The year-over-year increase came mainly from banks
decreasing credit loss reserves as the economic risks of the pandemic declined. Credit loss reserves
account for potential future losses on loans and other assets by adjusting income on those loans and
assets. Banks greatly increased reserves early in the pandemic, likely in response to the fear that the
pandemic would cause widespread losses—accounting for $132.2 billion in credit loss expenses in 2020,
a 140% increase from 2019 expenses at $55.1 billion.
Another possible contributing factor to the increase in credit loss reserves in early 2020 might have been
the adoption of a new credit loss reserve standard—Current Expected Credit Loss (CECL)—which
requires earlier recognition of losses. Although the largest banks were required to implement CECL
beginning December 15, 2019, the CARES Act (P.L. 116-136) delayed the authority of the regulators to
require banks to use CECL until the earlier of the end of the public health emergency or the end of 2020.
The bank regulators also gave banks the option to delay the use of CECL for two years, followed by a
three-year transition period. To date, 319 banks have made the transition to using CECL, and 4,632 banks
have not. Reportedly, most of the largest banks, collectively holding nearly 80% of the industry’s assets,
are among those using CECL. This makes it difficult to determine precisely to what extent the recent
changes in loss reserve statistics are the result of the accounting change or the pandemic. (For more
information on CECL, see CRS Report R45339, Banking: Current Expected Credit Loss (CECL)).
Table 1. Banking Income and Loss Reserve Expenses

First Half 2021
First Half 2020
First Half 2019
Net income
$146.7 bil ion
$37.0 bil ion
$123.3 bil ion
Credit loss reserve expenses
-$25.2 bil ion
$114.8 bil ion
$26.7 bil ion
Source: FDIC, Quarterly Banking Profile: Second Quarter.
Loan Performance and Capital
Loan performance and capital levels—two indicators that deteriorate after a time lag—have yet to be
significantly affected by the pandemic.
The noncurrent loan rate (i.e., percent of loans more than 90 days past due or in nonaccrual status)
decreased during the first six months of 2021 as compared to 2020. However, as part of an exception
allowed under the CARES Act, banks are not yet reporting loans in forbearance as noncurrent. The
noncurrent rate as of the second quarter 2021 was 1.01%, a decrease from the second quarter 2020 at
1.08%, (see Table 2). For context, after the 2007-2009 financial crisis, the rate peaked at 5.46% in the
first quarter of 2010.
Loan charge-offs (when a bank gives up on a loan and writes off the loan’s reported value from its assets)
in the second quarter 2021 were less than a year ago. The net charge-off rate was 0.27%, down from
0.55% a year earlier. The post-financial crisis rate peaked at 3.00% in the fourth quarter 2009.
Banks added $158 billion in bank equity capital since the second quarter 2020. In the last crisis, bank
equity capital decreased by $44.9 billion, or 3.3%, in the third quarter 2008. The increase in capital was
mainly due to retained earnings—that is, profits that were not distributed to shareholders as dividends.

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Congressional Research Service
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Table 2. Loan Performance and Capital

Q2 2021
Q2 2020
Q2 2019
Noncurrent rate
1.01%
1.08%
0.93%
Net charge-off rate
0.27%
0.55%
0.50%
Bank equity capital (BEC)
$2,305 bil ion
$2,147 bil ion
$2,095 bil ion
BEC annual change
$158 bil ion
$52 bil ion
$114 bil ion
Source: Quarterly Banking Profile: Second Quarter.
The number of banks on the FDIC’s “Problem Bank” list decreased by four, to 51, from the first quarter
2021 to the second quarter 2021. No banks have failed in 2021 thus far. Three new banks opened in the
second quarter 2021.

Author Information

Raj Gnanarajah
Andrew P. Scott
Analyst in Financial Economics
Analyst in Financial Economics





Disclaimer
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