Lenders have been strengthening and repositioning their balance sheets over the past two years following the Themini banking crisis in early 2023, which have collapsed Silicon Valley banks, signature banks and a number of other financial institutions. While the industry will not be immune to the economic downturn, it is clear that it has some ways to benefit.
Understanding resilience first requires considering the causes of the industry’s crisis two years ago. At the time, it was believed that banks were low-capitalized due to increased concerns about the recession, partly because government debt securities lost a lot of losses after the Fed actively raised interest rates in 2022. This concern has triggered waste of deposits that have been trapped in higher yield alternatives such as money market funds provided by non-bank institutions.
This is different from the crisis facing banks in 2008. At that time, they had too much leverage and were exposed to too much mortgage securities due to the collapse of the housing market. This time, though, most banks’ solutions are just waiting. Through some securities purchased by banks during the pandemic, seeing some securities each quarter, reducing unrealized losses while enhancing capital levels and allowing banks to reinvest their gains at higher interest rates. For example, PNC Financial Services Group Inc. said that in its first-quarter earnings introduction, 24% of its securities and swap portfolio will mature by the end of 2026, which is expected to reduce unrealized losses in its portfolio.
To help support the balance sheet, bankers tightened their underwriting standards and slowed loan growth. The Federal Reserve’s quarterly senior lending officer opinion survey shows that lending standards for 2022 and 2023 tightened at a rate similar to the 2001 and 2008 recession. While this makes it harder for businesses and consumers to access credit, it leads to an improvement in credit performance. Auto Lender Ally Financial Inc. earned a loan it earned better in 2023 than in 2022, while annual loans in 2024 outperformed 2023 loans.
BloombergIt took two years to strengthen the balance sheet, and bankers entered 2025, with the environment for lenders moving from where regulators continuously improve the level of capital needed to one side, and as the economy strengthens, the Trump administration will ease the demands. Despite the economic outlook becoming volatile, at least banks have a solid balance sheet and an offensive appetite, which currently means paying off the stock. PNC officials answered a question during an income call with investors and analysts, saying it was a good assumption that they would speed up stock buybacks. Truist Financial Corp. said it already had as many stocks in April as it did in the first quarter. Jamie Dimon, CEO of JPMorgan Chase & Co., said he sees the recession as an opportunity to buy back more stocks.
With the uncertainty of the path to short-term and long-term interest rates, movement in both directions seems to be opportunities for banks. If long-term interest rates remain rising due to inflation caused by tariffs or loss of confidence in U.S. financial assets, banks will be able to invest capital at higher rates as their low-yield securities continue to mature. And if the Fed ends up lowering the benchmark interest rate than expected, short-term interest rates may drop faster than long-term interest rates, which could help boost banks’ profits by widening the gap between their capital costs and their income in terms of loans and securities holdings. This will also potentially reduce unrealized losses of any low-collateralized securities it still holds. And, over time, if manufacturing activities and production are transferred back to the United States from other countries, banks have the opportunity to increase the opportunity to lend, whether it is in the aspect of providing additional trade by domestic producers, whether the volume of trade will decrease in domestic trade, or the additional transactions that cause factory construction in enterprises, whether it is in the short term, whether it is in the aspect of business, whether it is in the aspect of trade in enterprises, or in the aspect of factory construction, there is an opportunity. The healthier economic environment they envisioned is coming, and they are in a strong position to wait for the turmoil and be ready to support the economy and their own destiny whenever the storm is over. This is the difference this time.
