US banks are walking into a potential recession with stronger balance sheets, tighter credit standards, and less exposure to financial landmines than they had just two years ago.
This unexpected strength isn’t due to smart planning for the current economic disaster. It’s fallout from the chaos of early 2023, when Silicon Valley Bank, Signature Bank, and a few others collapsed and forced the entire banking industry to clean house.
According to Bloomberg, that wave of self-preservation is now helping banks handle the messier environment created by tariffs and volatile markets.
What triggered the 2023 crisis was the buildup of unrealized losses on government bonds after the Federal Reserve jacked up interest rates in 2022. Investors lost confidence, and deposits fled into higher-yielding alternatives like money market funds.
That run didn’t happen because of bad lending—it happened because people didn’t want to leave their money in banks stuck with bonds paying next to nothing.
Unlike the 2008 meltdown, where the problem was subprime loans and too much leverage, the solution in 2023 was surprisingly low-key. Most banks just waited. As the ultra-low-yield securities they’d bought during the pandemic started to mature, those paper losses began to shrink.
That passive strategy bought banks time and space to reinvest at higher returns. PNC Financial Services Group Inc. said in its first-quarter report that 24% of its bond and swap portfolio will mature by the end of 2026. That will chop $1.7 billion off its unrealized losses. That’s not small change.
Banks tighten lending, then return to offense
During the cleanup, banks didn’t just sit on their hands. They also slammed the brakes on credit. The Fed’s Senior Loan Officer Opinion Survey confirmed that banks tightened lending rules in 2022 and 2023 at a pace matching the early 2000s and the last recession.
While it became harder for both businesses and consumers to get loans, those that did performed better. Ally Financial Inc. said in its earnings last week that its 2023 loans outperformed those made in 2022, and 2024 loans are looking even better.
That defensive posture has now turned into cautious optimism. With Donald Trump back in the White House and regulators shifting toward lower capital requirements, lenders feel freer to go on the offensive.
Banks are now buying back their own shares aggressively. PNC executives told investors it’s “a pretty good assumption” that they’ll speed up buybacks.
Truist Financial Corp. already matched its entire Q1 buyback total in April alone. And Jamie Dimon, CEO of JPMorgan Chase & Co., said a recession would be a good time to buy more stock.
Interest rate swings offer new ways to profit
Uncertainty around interest rates isn’t scaring banks—it’s giving them room to move. If long-term rates stay high thanks to tariff-driven inflation or doubts about the US economy, banks can reinvest maturing capital into better-paying assets.
That raises future profits. But if the Fed cuts rates sooner and deeper than expected, banks might gain from a wider spread between what they pay on deposits and what they earn from loans. That’s how margins expand.
Lower rates would also ease unrealized losses by raising the market value of older, low-yielding bonds still on the books. It’s a win either way. And there’s more upside. If manufacturing starts shifting back to the US, there will be fresh lending opportunities.
Banks could fund working capital for American factories filling the gap left by reduced trade with China. Long term, if companies believe global trade flows are changing for good, that means more loans for new facilities.
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