WASHINGTON — The Office of the Comptroller of the Currency said the banking system remains stable, but faces growing pressures in profitability and credit quality as the economic landscape evolves, according to the agency's annual report released Friday.
"The condition of the federal banking system remains sound … [w]hile the economy outperformed expectations, driven by consumer spending and a strong labor market, the maturing economic cycle may introduce challenges, such as a cooling job market and financial stress on consumers," the report said. "Despite projections of a soft landing for the economy and slowing core inflation, banks face persistent risks from an inverted yield curve and elevated interest rates. Higher rates have boosted loan yields, but funding pressures and increased credit costs may strain earnings."
The report — issued by the top regulator of nationally chartered banks — provided a comprehensive overview of the financial health of the federal banking system. The OCC regulates 1,040 financial institutions — including 991 domestic banks and 49 federal branches and agencies of foreign banks operating in the United States — while managing over $16 trillion in assets, or 66% of total U.S. bank assets.
The OCC notes 727 of the banks it supervises are community banks with less than $1 billion in assets, while 57 institutions hold over $10 billion. The national banking system also manages 73.7% of the nation's credit card balances.
The OCC painted a picture of a well-capitalized and liquid federal banking system, which it attributed to the strong risk management and supervisory expectations undertaken during the Biden administration by acting Comptroller Michael Hsu.
Banks' capital grew to a historically high level in 2024. The overall Tier 1 leverage ratio for national banks — a key measure which compares a bank's core capital as a percentage of its total assets — rose to 8.9% in the first half of 2024, exceeding the historical average of 7.5% from 1984 to 2019. Liquidity levels also remained strong despite small erosion, with a ratio of 19.8% in mid-2024, well above the pre-pandemic rate of 15.3%.
Despite maintaining profitability above historical averages — a fact also alluded to in the Federal Deposit Insurance Corp.'s quarterly reports for 2024 — the system has experienced challenges with other performance indicators.
Return on assets, a key profitability metric, stood at 1.2% in the first half of the year, down slightly from 1.3% in 2023 but still above the long-term average of 0.89%. However, net income has declined by 5.7% since the beginning of 2024, driven by shrinking net interest margins as depositors sought higher yields on deposits.
Community banks in particular felt pressures from rising credit costs and inflation's impact on noninterest expenses. Such firms saw a 6.6% decline in net income and a modest 0.5% drop in net interest income.
Credit quality within the federal banking system remained solid this year, but has shown slight signs of weakening as the year progressed. Nonperforming loans increased to 1.0% by mid-2024, up from 2023 levels, still well below the historical average of 2.3%. Banks have also increased their provisioning by 7.1% to prepare for anticipated credit costs as the labor market softens and low-yielding loans are repriced. Community banks took a more conservative approach this year, with a 5.4% rise in provisioning. Additionally, net charge-offs — the amount of bad loans a bank writes off, minus what it recovers later — have risen modestly, but overall loan performance continues to compare favorably to long-term averages.
The report also underscored four long-term priorities that have characterized Hsu's approach to regulating: guarding against complacency, elevating fairness, adapting to digitalization and managing climate-related financial risks.
The OCC issued 10 rulemakings in 2024 — both final and in progress — with a focus on modernizing consumer protection and prudential regulations and enhancing oversight across the sector. The agency issued a joint proposal to implement the Financial Data Transparency Act and amendments to Bank Secrecy Act compliance rules, aligning them with updated anti-money-laundering and counter-terrorism financing standards.
The agency finalized rules for automated valuation models in residential real estate and a notice of proposed rulemaking updating recovery planning guidelines for large banks. Additional actions updated Freedom of Information Act procedures, refined bank merger review processes and incorporated electronic communications into administrative hearings.
The agency also moved to strengthen regulations implementing the Community Reinvestment Act through a finalized rule, a major undertaking for which acting Comptroller Hsu has been
Federal banking regulators including the OCC, the FDIC and the Federal Reserve have since
"We continue to work to enhance our mutually reinforcing efforts to ensure compliance with fair lending laws," wrote the agency. "Most recently, we have developed screening methods that can identify potentially discriminatory CRA assessment areas by using census and geographic data to detect when communities of color are located near — but excluded from — the boundaries of an assessment area."
