FDIC Risk Review: The Largest Banks Remain Well Diversified

It is well known that diversification in an investment portfolio lowers its risk. The same is true for a bank’s loan portfolio: a broad portfolio of various loan types is well diversified and lowers risk. Financial Services Forum members, the eight U.S. GSIBs (global systemically important banks), are among the most diversified banks in the country. Furthermore, with $899 billion in common equity tier 1 capital, more than triple the amount held in 2009, the nation’s largest banks are highly capitalized, acting as a source of stability for the U.S. economy as they have done both throughout the pandemic and in the most recent wave of bank failures.

In this blog, we use data from the FDIC’s 2022 Risk Review, the most recent available, to provide further evidence of the safety and stability of the largest U.S. banks by highlighting the exceptional diversification of their portfolios in three key loan markets: agriculture, commercial real estate (CRE), and housing. We also use data from first-quarter 2023 bank reports to demonstrate that risk concentrations in these loan markets tend to increase as bank asset sizes decrease, demonstrating that large banks are far less likely to contain heavy concentrations of risk in their portfolios. Accordingly, while recent concerns about a souring commercial real estate market are not without merit, these developments are unlikely to have a material negative impact on Forum members due to their low concentrations and high degree of diversification.

Real Estate Loan Concentration and the 2022 FDIC Risk Review 

The FDIC considers a bank’s real estate lending portfolio to be highly concentrated and therefore high risk if the total exposure to a single type of loan is greater than three times the bank’s total tier 1 capital. For example, a bank with $300 billion in agricultural loans and only $100 billion in tier 1 capital would be considered ‘highly concentrated’ in agricultural lending. In Table 1, we show the percentages of all U.S. banks with high-risk concentrations in three important loan markets as measured by the FDIC, and the percentages of Forum members with high concentrations in the same markets.

Table 1: Risk Concentrations Among U.S. Banks and Financial Services Forum Members

Source: FDIC 2022 Risk Review & FR Y-9 Data 

While 5 percent of U.S. banks are highly concentrated in agriculture, 27 percent in CRE, and 10 percent in housing, none of the U.S. G-SIBs exhibits a high concentration in any of these markets, showing that Forum members contain both healthy levels of tier 1 capital and broadly diversified lending portfolios.

In Table 2, we extend the analysis to look at the average level of loan concentration in each market for banks of different sizes to demonstrate how lending concentrations are distributed throughout the banking sector. As before, the loan concentration reported in the table is defined as the average exposure to each loan type (agricultural, CRE, residential) measured as a percentage of tier 1 capital. As an example, a CRE risk concentration of 50 means that banks in that asset category have, on average, an exposure to CRE that is 50 percent as large as the amount of tier 1 capital maintained by banks in that asset category.

Table 2: Risk Concentrations Among U.S. Banks by Asset Size

Source: 2023Q1 Call Report Data

As shown in Table 2, banks with greater than $250 billion in total assets exhibit the smallest average risk concentration in both commercial real estate and housing. They also exhibit the second smallest average risk concentration in agricultural loans, just behind banks with $100 billion to $250 billion in total assets. As banks decrease in size, the average concentration in all three markets increases, and eventually peaks for banks with less than $10 billion in total assets. Thus, while the largest banks hold an average concentration of 47 percent in CRE, far below the 300 percent marker, banks with less than $10 billion in assets have an average concentration of 230 percent, demonstrating that large banks are the most diversified.

Conclusion 

The largest banks in the United States are resilient and well diversified, acting as a source of strength and stability for the U.S. economy. As we have demonstrated, highly concentrated loan portfolios, which increase risk in the banking industry, tend to be found among banks of smaller asset sizes rather than their larger counterparts. Policymakers and regulators looking to decrease risk in the banking system should take these facts into consideration and avoid penalizing banks that are both highly diversified and well capitalized.