COVID-19-Related Impact on the Banking Industry: Conditions in the First Quarter 2021

INSIGHTi
COVID-19-Related Impact on the Banking
Industry: Conditions in the First Quarter 2021
September 9, 2021
Although bank regulation is designed to al ow banks to withstand some amount of unexpected losses,
some worry that the economic ramifications of the COVID-19 pandemic could result in enough borrowers
missing loan payments to cause distress for banks. This Insight presents certain bank industry statistics for
the first 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, potential y 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—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 wel . However, as the pandemic continues
to affect the economy and the option to request loan forbearances expires on September 30, 2021, signs of
stress may emerge.
The Federal Deposit Insurance Corporation (FDIC) releases comprehensive data on bank condition and
income quarterly. The Quarterly Banking Profile: First Quarter 2021 reports aggregate data from al
4,978 FDIC-insured institutions as of March 31, 2021.
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Income and Loss Reserves
First quarter 2021 profit for the banking industry was $76.8 bil ion (see Table 1), a 315% increase from
the first quarter 2020. The year-over-year increase came mainly from banks decreasing credit loss
reserves. Credit loss reserves account for potential future losses on loans and other assets by adjusting
income on those loans and assets. First quarter 2020 profit for the banking industry was $18.5 bil ion as
banks provided for credit losses and other impairment charges. 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 bil ion in credit loss expenses in 2020, a 140% increase from 2019 expenses at
$55.1 bil ion. In addition, net interest income in 2020 declined by $20.0 bil ion (or 3.7%) as the average
net interest margin (the difference between the interest rates banks earn and pay out) decreased to 2.82%
from 3.36%.
Another possible contributing factor to the increase in credit reserves losses 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 CECL was required to be implemented by the largest
banks 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, 320 banks have made the transition to using CECL,
and 4,658 banks have not yet. Reportedly, most of the largest banks that collectively hold nearly 80% of
the industry’s assets are among those using CECL. This makes it difficult to determine to what extent the
recent changes in loss reserve statistics are the result of the pandemic. For more information on CECL,
see CRS Report R45339, Banking: Current Expected Credit Loss (CECL).
Table 1. Banking Income and Credit Loss Reserve Expenses

Q1 2021
Q1 2020
Q1 2019
Net income
$76.8 bil ion
$18.5 bil ion
$60.7 bil ion
Credit loss reserve expenses
-$14.5 bil ion
$52.7 bil ion
$13.9 bil ion
Source: FDIC, Quarterly Banking Profile: Fourth 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)
increased during the first quarter of 2021. However, as part of an exception al owed under the CARES
Act, banks are not yet reporting loans in forbearance as noncurrent. The noncurrent rate as of the first
quarter 2021 was 1.14%, an increase from the first quarter 2020 at 0.93% and from the first quarter 2019
at 0.99% (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)
ticked down from a year ago in first quarter of 2021. The net charge-off rate was 0.34%, down from
0.55% a year earlier. The post-financial crisis rate peaked at 3.00% in the fourth quarter 2009.
Banks added $135 bil ion in bank equity capital since the first quarter 2019. In the last crisis, bank equity
capital decreased by $44.9 bil ion, 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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Table 2. Loan Performance and Capital

Q1 2021
Q1 2020
Q1 2019
Noncurrent rate
1.14%
0.93%
0.99%
Net charge-off rate
0.34%
0.55%
0.09%
Bank equity capital (BEC)
$2,250 bil ion
$2,115 bil ion
$2,056 bil ion
BEC annual change
$135 bil ion
$59 bil ion
n/a
Source: Quarterly Banking Profile: Fourth Quarter.
The number of banks on the FDIC’s “Problem Bank” list increased by one, to 55, from the fourth quarter
2020 to the first quarter 2021. No banks have failed in 2021 thus far.

Author Information

Raj Gnanarajah
David W. Perkins
Analyst in Financial Economics
Section Research Manager





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