Bank Earnings Season: What the Big Four Are Telling Us About the U.S. Economy

It's earnings release season and pundits are out in full force reading the tea leaves from banks in their coverage universe. I took a different approach.

I analyzed the earnings releases and the earnings calls of the U.S.'s top four banking companies: JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. Together, they represent a hard-to-ignore $13.4 trillion of total assets. 

I didn't do it to gauge these banks prospects. Instead, I did it to decipher their financial performance, condition, and their commentary on the U.S. economy and banking sector. Below is a summary of those four banks disclosures, aided by Copilot to help absorb a lot of information.

1. The U.S. Economy: Resilient, Not Reaccelerating

Unambiguous signal:
The U.S. economy in early 2026 is holding together better than feared, but it is not entering a new growth phase.

Across all four banks:

• Consumers are still spending

• Corporate balance sheets remain solid

• Credit deterioration is limited and gradual

• Confidence is cautious, not retreating

Yet no CEO described demand as accelerating. The language was consistent: “Resilient,” “stable,” “cautious,” “selective,” “uneven.”

It would be unusual for a financial institution to clamor about bubbles bursting or economic decline because that happens for multiple reasons, one of which is consumer and business confidence. Why buck the confidence game? The bankers' comments point to a late‑cycle soft‑landing environment rather than a boom or a slowdown cliff.

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2. Where the U.S. Economy Is Strong

A. The U.S. Consumer (Top Half of Consumers Are Carrying the Load)

What banks see:

• Debit and credit card spend volumes are still growing
• Travel, leisure, and services spend remains firm
• Wealth clients are active
• Credit card losses are higher than cycle lows, but below stress thresholds

Important nuance from calls:

• Wells Fargo and JPM both emphasized bifurcation
• Upper‑income households and asset owners are fine
• Lower‑income consumers are under pressure—but not yet cracked

Translation:
Aggregate data looks healthy because the top half of consumers is offsetting softness below. That’s sustainable for a while—but not indefinitely. The highly leveraged are vulnerable. 

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B. Corporate America: Balance‑Sheet Strength > Confidence

Across all four banks:

• Investment‑grade borrowers dominate new lending
• Revolver utilization remains below historical norms
• Cash balances are solid
• Debt issuance is active, especially in investment grade and term markets

What’s missing:

• No surge in utilization
• No capex boom
• No hiring acceleration

Translation:
Firms are financially strong but waiting, not expanding aggressively. Volatile and changing government policies and priorities are keeping us in a hovering mode.

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C. Financial System Health

This may be the strongest message of all.

• CET1 ratios are strong across the board
• Liquidity is abundant
• Funding is stable
• No signs of liquidity strain
• Nonbank exposures (NBFI, private credit, fund financing) are actively monitored and structurally conservative. The fact they had to emphasize this makes me think there is something to the weakness in this lending.

Translation:
Whatever macro risks lie ahead, the U.S. banking system is well positioned to absorb them. At least much more so than 2008.

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3. Where the U.S. Economy Is Weak or Vulnerable

A. Growth Is Narrow, Not Broad

Growth is currently relying on:

• Consumer spending
• Financial services activity
• Capital markets normalization

It is not relying on:

• Manufacturing boom
• Wage acceleration
• Productivity surge
• Broad business investment

This makes the expansion slow and fragile, even if not imminently unstable.

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B. Lower‑Income Consumer Stress Is Real (But Contained—for Now)

Multiple banks independently referenced:

• Higher sensitivity to fuel and commodity prices
• Thinner household and business financial buffers
• More price elasticity in discretionary categories

Credit data has not yet turned sharply—but early warning signals are visible.

Translation:

This is not a recession signal—but it is a reminder that the consumer story rests on a narrower base than headline numbers imply. Bubbles bursting might be a recessionary signal, but air is slowly seeping from would-be bubbles, as it has in the commercial real estate and multi-family markets.

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C. Rates Are a Double‑Edged Sword

• Banks are no longer getting easy net-interest income lift from falling rates
• Asset‑sensitive banks (WFC, BAC) are facing NIM compression
• Rate cuts would help borrowers—but hurt bank earnings power particularly in under-valuing deposits
• Higher‑for‑longer stabilizes income but pressures marginal borrowers

Translation:

Monetary policy is now distributional, not uniformly stimulative or restrictive. The 2Y Treasury is 3.83%, 10Y is 4.34%. Fed Funds, and overnight rate, sits between the 1Y and 2Y.

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What the Four Banks Say About the U.S. Banking Sector

4. Sector Diagnosis: Strong, Profitable, but Entering a New Phase

The earnings collectively show the banking sector has moved from:

Post‑crisis repair → Post‑pandemic stabilization → Post‑rate‑hike normalization

We are now in a phase where:

• Earnings are solid
• Credit is manageable
• Capital is abundant
• Growth depends on execution, balance sheet and revenue mix, and discipline

This is not a leverage‑driven cycle. Which speaks to the ability of balance sheets to withstand recession.

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5. Strengths of the U.S. Banking Sector

A. Capital & Liquidity Are Not the Constraint

Every bank emphasized:

• Excess capital
• Share buybacks
• Ability to support clients in stress-although the temptation to abandon stressed clients is there
• Regulatory clarity improving (Basel, G‑SIB)

This is the opposite of 2008 or 2020.

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B. Credit Underwriting Is Conservative

Evidence across banks:

• High share of investment‑grade exposure
• Structural protections in NBFI lending
• Sub‑60% advance rates in private credit
• Limited CRE office exposure relative to system capital

The industry has learned—perhaps overly learned—the lessons of the last cycle.

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C. Fee Businesses Are Doing the Heavy Lifting

An underappreciated macro point:

• Payments, treasury services, asset management, and markets are now core earnings engines
• This reduces dependence on rates
• It stabilizes earnings across cycles

Citigroup’s Services and JPMorgan’s payments ecosystem are emblematic here. Community financial institutions can learn something here, stop talking about it, and start making the investments necessary for fee businesses to be a larger contributor to revenues and profitability.

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6. Weaknesses and Structural Challenges

A. Earnings Are More Sensitive to Confidence Than Credit

Paradoxically, the biggest risk is not defaults—it’s activity.

Banks need:

• Deal flow
• Markets activity
• Client engagement
• Balance‑sheet utilization

A confidence shock—even without a deep recession—would hit earnings faster than credit losses because bank balance sheets are positioned for moderate credit shocks.

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B. Margin Compression Is Structural

Net interest margins are no longer expanding easily.

• Deposit betas are higher. As pricing becomes more transparent and money movement easier, this is unlikely to change.
• Asset mix is shifting to lower‑yielding products
• Competition is rational but real

This pushes banks toward:

• Cost discipline
• Fee growth
• Balance‑sheet optimization

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C. The Cycle Is Now About Sorting, Not Survival

The era when “banks move together” is over.

• Strong franchises gain share
• Execution matters more than a unique strategy
• Management and markets remain key ingredients

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Bottom‑Line Interpretation

What the Big Four Are Telling Us—Taken Together

About the U.S. economy:

• It is resilient but not robust
• Slow growth is holding, not accelerating
• Risks are asymmetric but manageable
• A soft landing remains the base case

About the banking sector:

• It is healthy, liquid, and profitable
• Credit risk is contained
• Capital is a strategic asset again
• The next phase rewards discipline, not leverage

~ Jeff

The Scale Imperative: Banks Can Acquire Credit Unions

The traditional financial industry is facing a quiet, steady drain of its lifeblood. While the "unbanked" population is shrinking, the "loyalty" of the modern consumer is fragmenting. Millennials and Gen Z—the oldest of whom are now 45—are systematically moving their balances away from traditional institutions toward "cool" digital tools and high-yield platforms like Rocket or SoFi. Even loyal Gen X customers are increasingly treating their primary bank accounts as "paycheck motels", a term coined by Ron Shevlin, quickly routing funds to wherever they earn the most.

To survive this shift, banks don't just need better apps; they need scale.

The Untapped Reservoir of Retail Funding

Many banks have pivoted toward business banking to find higher balances and margins, but the foundation of a community bank’s funding remains retail deposits. Interestingly, the most robust retail deposit bases are currently locked inside credit unions—institutions that are struggling with their own scale issues and merging at a similar clip to banks.

While credit unions buying banks have dominated the headlines and trade group lobbying, it is time for the industry to flip the script. Banks can—and should—buy credit unions.

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Industry Interest

I recently sat on an ABA panel at the recent ABA Washington Summit about this very issue. Joining me were industry experts on such transactions from law firm Luse Gorman and the ABA, moderated by Dave Daraio of Maspeth Federal Savings and Loan Association in Queens. The message: let’s pivot from lobbying against CU-bank deals to executing our own. It can be done.

Debunking the Myths of the "Impossible" Deal

The industry has long viewed bank-on-CU acquisitions as a regulatory and accounting nightmare. And recent history is no help. But the landscape has shifted:

• The Legal Path Exists: Federal law (12 U.S.C. §1785) and NCUA regulations (12 CFR Part 708a, Subpart C) explicitly provide the roadmap for a bank to acquire the net assets of a credit union.
• Regulatory Winds are Changing: The NCUA is currently rewriting its rules to make charter conversions to mutual banks easier, and is potentially "defanging" the poison pills of the past that they have wielded to thwart bank-CU deals.
• The Efficiency Edge: Despite their tax-exempt status, credit unions are often less efficient than banks. For similarly sized institutions, banks have historically delivered better financial performance, even after paying taxes.

Overcoming the Capital Hurdle

The primary challenge is accounting. These deals are structured as asset purchases where the credit union’s value must be distributed to its members. While this can strain a buyer’s capital, it creates a unique opportunity for:

• Stock Banks: Their ability to raise fresh capital gives them an advantage in absorbing these assets.
• Larger Banks Buying Smaller CUs: When a larger bank acquires a smaller credit union, the capital contingencies become negligible, making the deal "cleaner" and faster to execute.
• Member-to-Mutual Deals: The NCUA would likely be friendlier toward deals where credit union members gain depositor rights in a mutual bank.

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Call to Action: Who Will Step Up?

We are currently in a favorable regulatory environment for deal-making. And I will confess that my firm would welcome the opportunity to be at the forefront of this deal-making. More important to readers, we cannot continue to ignore the fact that our retail funding base needs a massive infusion of scale to compete with non-traditional providers while doing so profitably.

Credit unions have the deposits banks need, and many are looking for an exit due to scale or succession issues or a way to provide more flexibility to their members.

The tools are in the manual. The law is on the books. The market demand is clear.

It is time for bank leadership to stop complaining about credit union expansion and start executing their own. Who is going to step up and lead the first major "reverse" merger of this new era?

~ Jeff

Guest Post: Financial Markets and Economic Update for First Quarter 2026

 A Wild and Cold Quarter

I can only remember one other winter that was as cold as what we just experienced.  A snowstorm hit the Northeast on January 25^th, followed by a period of ice and freezing rain and days and days of a polar vortex, with brutally cold temperatures and wind chills.  Many days did not make it out of the single digits and roads were icy and winds fierce.  It reminded me of January, 1994, when we had a similar storm of snow and freezing rain.  Temperatures didn’t get above freezing for two weeks then, at which time the ice on the roads finally melted.  Every bone in your body felt frozen.  We escaped to Florida at the end of February and basked in the warmth.  We even got one moment of fame, when the Golf Channel filmed us live as we were getting our picture taken at the infamous Bear Trap at PGA National during the Cognizant Classic on February 27^th.

The quarter will also be remembered for volatile markets and a lot of events that moved markets.  Rallies on stocks, bonds, gold, silver, cryptocurrencies, and energy prices were soon met with selloffs and volatility.  The quarter started with the surprise of the US Military entering Venezuela on January 3^rd, arresting Nicolas Maduro and his wife, and bringing them to the US.  Venezuela surprisingly cooperated with the Trump Administration afterwards in opening their oil markets; the benefits to the people there will hopefully be an economy that grows and a life with freedom.

On January 30^th, President Trump nominated Kevin Warsh for Federal Reserve Chairman to replace Jerome Powell when his term expires on May 15th.  (In my mind, May cannot come soon enough).  The markets fell from their lofty highs, especially gold and silver, when they realized Warsh’s actions might actually support and defend the dollar.  Warsh believes that interest rates can be lower and the economy can grow strongly without inflation, with something called productivity.  Warsh also believes in targeting money supply to control inflation, which would make Milton Friedman proud.  Enough of the Phillips curve.  Enough of the ridiculous economic projections and the even more ridiculous Dot Plots.  Enough of thinking it’s okay to meet your inflation target two years out (i.e. do your job), as nearly every recent projection has shown.  Enough of the bloated Fed with its 3,000 economists and staff.

I’m not alone in my disgust for Powell.  On March 18^th at his press conference (which I heard about later since I avoided watching him), Powell said he would stay on as Chairman Emeritus if Warsh was not confirmed by the Senate by May and would, in any event, stay on the FOMC until the DOJ’s criminal investigation is concluded.  The markets hated to hear this.  Stocks sold off immediately and ended the day with losses.  The man who I once called a hero at the beginning of the Covid pandemic (what is wrong with me?) has overstayed his welcome.  He does not have any answers.  “We just don’t know” is his favorite phrase.  Enough!

A partial government shutdown occurred on January 31^st, with DHS as the only Department not funded.  Democrats did not want ICE funded.  Hello…ICE was already funded into 2029 in the OBBB passed last summer.  But still DHS is unfunded today and TSA is in the headlines, with airport security lines in many cases taking three to four hours due to short staffing and resignations.  Ironically, ICE was sent in to help TSA.  I’m so glad we traveled in late February.  FEMA, the Secret Service, the Coast Guard, cybersecurity analysis, and other operations are also unfunded and held hostage still.

Speaking of late February, on the 28^th, the US and Israel began a bombing campaign on Iran.  The decision was made urgently when the Iranian foreign minister bragged to US negotiators that Iran had 440-460 kilograms of 60% enriched uranium, sufficient, with more refinement, to make eleven nuclear warheads within a short time.  The Iranian people had tried peacefully protesting the regime in January, only to have an estimated 30,000 citizens shot/killed by Iranian “security.”  Trump promised that “Help was on the way” and it arrived.  One of the first bombs killed the Ayatollah and 40 senior leaders.  Since then, the bombing has been non-stop, but Iran has lashed out with drones and missiles fired at its Middle East neighbors, especially Israel, and has been threatening ships in the Strait of Hormuz.  This matters because crude oil is trading at $96 per barrel today and Brent crude is at $108, with an unusually wide spread between the two.  Gas prices have risen from $2.90 per gallon at the end of February to $3.98 today.  Once a tipping point is reached, consumers will cut back on spending on other goods and services.  The conflict with Iran and uncertainty about oil and gas prices took stocks and commodities off their recent highs, set early in the quarter.  (DJIA 50,000; S&P 7,000; Nasdaq 23,000; gold 5,500; and silver 120).  But figure this one out- the dollar index, DXY, is back close to Par at 99.24, up from 96.45, which was the recent low in January.

Some of my Favorite Economic Indicators

Leading Economic Indicators (LEI)- The Conference Board indicator was down again in January by -.1%, following December at -.2%, and November at -.3%.  The index has been negative for 40 of the past 44 months (no change in July 2025, May 2025, November 2024, and March 2024), signaling a recession that never came.  It’s not the only once reliable indicator to “fail” as no recession followed.  The inverted yield curves of 2022 to 2024 pointed to recession, too.

Real GDP- The Atlanta Fed’s GDP Now is currently at +2.0% for 1Q26, following a weak 4Q25 reading of +.7%, and full year 2025 of +2.2%.  Major world economies are also weak.  China just lowered its GDP projection to 4%-5% this year, which is the lowest since 1991, due to weak consumer demand, high debt, real estate crisis, tariffs, and an aging population.  It all sounds so familiar.  The economies in Japan, Germany, and the UK are no better.

Moody’s Beige Book Index-  An improvement in the districts occurred in March’s report, with the index at 16.7, following January 5.6, December 11.1, October 13.9, and September 0.

M2 Money Supply- February saw a mini-surge in M2 at +4.9% year-over-year, probably due to the Fed’s cognitive dissonance of not lowering interest rates.  January was +4.3%, December was +4.2%, and November was +3.9%.  The velocity of money ticked up to 1.41 in 4Q25 and 3Q25 from 1.39 in 2Q25 and 1Q25, boding well for GDP growth.  (Remember GDP=M x V).

Inflation- I was very excited by the February CPI report, which was +2.4% y-o-y and the core was +2.5%, both at the implied Fed target.  But the subsequent releases dampened my enthusiasm.  PPI came in very hot and very nasty at +3.4% y-o-y and the core was +3.9%.  PCE (upon which the Fed targets are based) for January was +2.8% and the core was +3.1%.  What gives?  PCE is greater than CPI?

CPI vs PCE- What’s Going On?

When February’s CPI was released, many business writers and talking heads complained that inflation was above target.  Well, for the first time since May, 2025, CPI did hit its implied target versus PCE.  Treasuries celebrated when no one else would, with the 2-year yield down to 3.41% and the 10-year yield down to 4.05%.  As I have written ad nauseum, Fed policy targets are set using PCE, which generally runs 50 basis points less than CPI because of the inclusion in PCE of substitution effects.  Since 2010, CPI has averaged 3.0% per year and PCE averaged 2.48%.  The spread between them showed about 50 basis points, as expected.  CPI hitting target in February probably won’t matter now as energy prices have risen substantially with the Iran conflict.

January’s PCE report came out with the y-o-y changes above 3%, higher than CPI.  The indices are constructed differently, with price effects of goods and services at different proportions.  CPI is down due to housing costs and rents dropping a lot over the past six months.  Rents are now at a 4-year low of $1,353 per month and are down -1.4% y-o-y.  PCE has a lower percentage of housing costs and also a higher percentage of other service costs rather than goods.  It may take some time for CPI and PCE to revert to their average relationship.

Private Credit Crisis Brewing?

Jamie Dimon sounded the alarm months ago when JPM Chase took charge-offs of private credit company (non-bank) loans and restricted new lending to them.  The $1.8 trillion market is comprised of many loans to private credit companies to make their loans; the loans are contained in funds managed by Blackrock, Goldman Sachs, T Rowe Price, Blue Owl Capital, Morgan Stanley, KKR, Apollo, and others.  They have restricted withdrawals from funds to no more than 5% in many cases as investors unsuccessfully scrambled to pull their money.  Liquidity crisis anyone?  It certainly bears watching.

Ending a Wild Quarter

Venezuela, Iran, and Cuba were not anticipated before this year began.  It shows how quickly things can change.  Other notables in the first quarter:

-          Independent journalist, Nick Shirley, exposed massive fraud in Minnesota regarding shell day care and healthcare companies throughout Minneapolis to the tune of $9 billion.  This led to probes expanding from Minnesota to California, Ohio, Maine, and New York.

-          The polar vortex finally ended!  March had some warm days.

-          The Cinderella story of the 16-0 Indiana Hoosiers had a happy ending with their NCAA championship victory over Miami  27-21.  I thought it was more exciting than the Super Bowl.

-          The Supreme Court ruled that the tariffs imposed by President Trump were not legal using the 1977 IEPPA law.  But tariffs can be placed using other existing laws and these laws were detailed in the ruling.  So, the markets really didn’t care.

-          New highs were reached in stocks, gold, and silver but volatility returned with a vengeance and prices all fell back.  Just ask bonds.

-          And congratulations to Giorgia Meloni and the entire Italian team for putting on a great Winter Olympics.  Giorgia, we will see you this summer…

 

Thanks for reading!  As always, I appreciate your support!  DLJ 03/24/26

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Disclaimer: This publication is provided to you solely for educational and entertainment purposes.  The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed.  The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice.  The author cannot provide investment advice but welcomes your comments.

Bank Board Exchange Ideas: Deposits and Liquidity

During a recent banking conference, my colleague and I led a peer exchange with community bank board members. To guide the conversation, we selected topics based on our experience and prior board surveys. The list included:

 - Liquidity and Deposits

- Credit Risk and Commercial Real Estate Stress

- Fraud

- Cybersecurity

- Economic and Geopolitical Uncertainty

- Strategic Execution

- Artificial Intelligence

- Succession Planning

- Wild Card (an open category)

 

Interestingly, no groups chose to discuss credit risk, CRE stress, geopolitical uncertainty, strategic execution, or any wild-card topics. Whether these felt too routine or too sensitive, they stayed untouched.

What captured the most attention—rightfully so—was liquidity and deposits. Since 2009, the number of U.S. bank branches has declined from nearly 100,000 to about 76,000 today, reflecting industry consolidation and branch profitability. Over the same period, the number of FDIC-insured institutions has nearly halved. Given this backdrop, branch consolidation, especially through mergers, is unsurprising.

As branches consolidated, the average deposits per branch grew dramatically. Using profitability data gathered across hundreds of community bank branches from my firm's profitability outsourcing service, reading right to left, we found that typical branch deposit levels more than doubled over the past decade. And these were community bank branches. No Wells Fargo, no Citi.

 

A similar trend appeared in deposit accounts, using retail money market accounts as an example. Ignoring the temporary spike during COVID, average balances rose from under $50,000 to roughly $80,000. Operationally, supporting an $80,000 account requires no more effort than supporting a $50,000 one, but it generates more spread income although it comes with more liquidity risk. The loss of one larger depositor hurts more.

The larger challenge for community banks is that they are not generating many net new deposit accounts. Big banks, fintech firms, and credit unions are winning the competition for new customers, creating constant headwinds. In response, community banks have increasingly pursued larger accounts—large commercial and municipal deposits. While helpful in the short term, these relationships tend to be volatile, especially in rising-rate environments, as recent Fed tightening demonstrated.

This is why banks must strengthen their marketing, sales strategies, and messaging about the value of depositing with a local institution. Deposits at community banks fund small businesses, local homeowners, and the broader community. In fact, a community bank can lend approximately $10 into its local economy for every dollar it earns in profit. By contrast, the destination of a fintech deposit is lost in translation.

 

Community banks have done well to grow and fund their balance sheets, but the concerns expressed by directors regarding future deposit gathering are well-founded. Chasing only large accounts while neglecting retail and small business depositors is risky. Don't do it.

 

Below is a blackboard of the ideas board members shared for strengthening community bank liquidity and deposit gathering:

~ Jeff

What Really Drives Bank Value—and What To Do Next

Earlier this month, I attended Bank Director’s Acquire or Be Acquired conference. As always, the sessions were strong and the hallway conversations even stronger. But the most thought‑provoking insights I carried with me didn’t start at the conference—they started on the plane ride there.

I was listening to Street Talk by S&P Capital IQ, hosted by longtime industry colleague and friend Nathan Stovall. His guest was Jonah Marcus, a buy‑side fund manager with deep experience evaluating banks—and someone I’ve had the privilege of working with as a board member at one of our strategic planning clients.

I’ve seen Jonah operate up close. He understands what creates real value in banking—and more importantly, what doesn’t. His perspective is worth paying attention to.

Valuations: The Market Isn’t Coming to Save You

One message Jonah was unequivocal about: banks should not expect valuation multiples to rise in the near term.

Institutions trading at 10–11x earnings are unlikely to suddenly revert to historical averages of 12–14x. The same holds true for price‑to‑tangible book. In today’s market, valuation expansion is not a given—it is earned.

So what separates banks that trade at a premium?

• High‑quality, durable earnings
• Consistent profitability
• A clear specialty or niche that drives growth
• Strong core funding
• Superior, sustainable expense management that produces best‑in‑class efficiency ratios

In other words, the market rewards banks that execute exceptionally well—not those waiting for macro conditions to improve.

If your strategy depends on “multiple expansion,” it’s time to revisit the plan. Value creation today comes from disciplined execution, not market optimism.

Recession Watch: Two Perspectives Worth Weighing

Jonah also pointed to meaningful economic and credit tailwinds. Non‑performing loans remain historically low. Capital levels are far stronger than they were heading into the 2008 financial crisis. Banks have improved loan concentrations and overall risk discipline.

Nathan echoed this view at the conference, noting that there are few—if any—early warning “cockroaches” signaling an imminent recession.

I’m slightly more cautious.

We’re beginning to hear about “one‑time” or “isolated” credit events in third‑ and fourth‑quarter earnings calls, particularly from more aggressive lenders—those making larger loans or expanding outside their core markets. Historically, recessions often begin with asset bubbles bursting. Today, we still have a high‑flying stock market and residential real estate prices at elevated levels.

Reasonable people can disagree—and they do.

Whether you’re optimistic or cautious, now is the time to stress‑test assumptions, re‑examine concentrations, and ensure your balance sheet can withstand headwinds should they come. Hope is not a strategy.

Technology: Where Banks Are Falling Behind—and How to Catch Up

The most compelling part of the discussion centered on technology.

Jonah sees technology as a key differentiator today—and an even bigger one tomorrow. In his view, technology should deliver four outcomes:

1. Lower costs
2. Greater scalability
3. Delighted customers
4. Data‑driven, personalized sales and service

Here’s the reality check:

• Banks are generally doing well on cost reduction.
• They’re doing okay on scalability.
• They are largely failing at delighting customers and leveraging data.

Too many banks remain overly dependent on their core processors. Too few are using customer data to meet clients where they are—in an increasingly digital, personalized world.

Jonah’s point was simple but powerful:

If banks can leverage technology to achieve all four outcomes—even competently rather than perfectly—growth becomes easier, margins improve, customer satisfaction rises, and powerful network effects begin to take hold.

That’s how banks lift their heads above an increasingly commoditized competitive landscape.

Fintechs have already proven this model. Many are now seeking bank charters for a reason.

Jonah supports a crawl‑walk‑run approach to technology adoption—avoiding shiny objects and infrastructure strain. But in his view, given where financial technology stands today, banks should be much closer to walk‑to‑run than crawl.

If your technology strategy is still focused primarily on cost containment, you’re missing the bigger opportunity. The real upside is growth, differentiation, and customer relevance.

 

What This Means for You—and How We Can Help

For readers who know me, you’re aware that The Kafafian Group recently merged with Wolf & Company, P.C., a Boston‑based CPA and advisory firm. Together, we now bring deeper capabilities and broader execution support to financial institutions.

What does that mean in practice?

• Strategic plans that don’t just sit on shelves—but get executed
• AI and technology advisory aligned with business outcomes
• Deeper profitability analysis at the product, line‑of‑business, and center level
• Process improvement informed by internal audit and best‑practice insights
• Financial advisory that goes beyond negotiating the deal and running the numbers

Simply put: we can do more, and we can go deeper.

If these themes resonate—valuation pressure, technology differentiation, disciplined growth—I’d welcome the conversation.

You can reach me through this blog, at Jeffrey.Marsico@WolfandCo.com, or at (717) 468‑3208.

And yes—we’re continuing our This Month in Banking podcast, which celebrated its 10‑year anniversary in January 2026. Thanks for keeping us in your listening lineup.

Let’s keep the dialogue going.

~ Jeff

 

 

Note: This post was written by me, and improved by AI, which methodically is breaking my propensity for run-on sentences. Sister Mary Ryan would be pleased. 

 

Interest Rate Caps: Long History of Failure

President Trump called for a temporary, nationwide cap on credit card interest rates at 10% APR for one year, beginning January 20, 2026. He announced the proposal publicly through posts on Truth Social and reiterated it in remarks to reporters and in public speeches. His logic: it's a consumer‑protection measure aimed at reducing what he described as “excessive” credit card interest rates—often 20% to 30%, and higher for subprime borrowers.

Most bad ideas offered by government officials sound good. What's not to like? Champion the consumer that pays that level of interest rates while carrying credit card balances. To heck with the banks! I could see the pithy slogan on the protester sign. 

The problem is that in less time than it would take our hypothetical protester to grab his sharpie and scribble his sign, he could have asked his favorite AI tool to research when the US tried rate caps in its history and what was the result. You would think a reporter would do it and ask any proposer "didn't we try interest rate caps through various state usury laws and, according to a peer-reviewed New York Fed study that credit access declined sharply for high-risk borrowers and delinquency rates did not decline?"

The reporter could have entered the query as the populist, yet foolhardy proposal was coming out of the politician's mouth. In fact, going back through US history, using peer-reviewed studies to feed the summary table, it is clear that interest rate caps restrict credit, particularly for riskier borrowers. But that doesn't fit well on our protesters sign.

Period	Government Action	Result
Colonial-Early Republic	Statutory Usury Caps	Credit Shortages, off-book lending
19th Century	State Usury Ceilings	Slower growth, elite credit access
1933 - 1980s	Reg Q Deposit Caps	Bank disintermediation, loan contraction
2007 - present	Federal and State APR Caps	Reduced access for high-risk borrowers

Overarching Scholarly Consensus

Across four centuries of U.S. economic history, peer‑reviewed research consistently finds that: Interest‑rate caps reduce the supply of credit more reliably than they reduce the price of credit.

The empirical pattern—observed repeatedly in different eras, legal frameworks, and financial systems—is:

• Credit rationing

• Market exit by lenders

• Disproportionate harm to higher‑risk and lower‑income borrowers

• Minimal or no improvement in default outcomes

The evidence is clear and accessible. The question is, should policy be driven by observable facts and common sense, or by what sounds good?

~ Jeff

Sources:

Less for You, More for Me: Credit Reallocation and Rationing Under Usury Limits

THE EFFECTS OF USURY LAWS: EVIDENCE FROM THE ONLINE LOAN MARKET on JSTOR

Economic Conditions - Dallas Fed

The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century

What tool helped me find all of this peer-reviewed research without having to scroll through mountains of BS on a search engine? Copilot.

Guest Post: Financial Markets and Economic Update Fourth Quarter 2025

I had the best fourth quarter!  I’ve always wanted to visit Europe’s Christmas Markets and finally did in late November to early December on a Viking River Cruise from Budapest to Regensburg.  We loved Budapest, especially with both sides of the Danube River lit up at night.  We loved the Christmas Markets, especially in Budapest, Vienna, and Salzburg.  The best mulled wine was in Salzburg, which is an amazing city close to the Alps with so much culture and history.  The best food was in Regensburg.  It was special to sail from place to place, exploring, learning, shopping at Markets, listening to concerts, and enjoying every day.  For me, it is a dream come true and was actually a retirement gift, booked over two years ago.

Government Shutdown

We all saw it coming.  The government shut down on October 1^st when the Senate could not get 60 votes to get a continuing resolution passed.  Whatever happened to annual budgets, I’ll never know.  We keep pushing the current spending levels ahead by a few months.  Democrats first demanded $1.5 trillion in additional spending, including extension of Obamacare subsidies, which they themselves allowed to expire at the end of this year, but the Republicans held firm.  No.  Finally, in November, eight Democrats crossed the aisle to get to the 60 votes needed to pass the continuing resolution and reopen government, but with a near-term expiration of January 30^th.  It was the longest shutdown in history at 43 days.

So, we get to go through this madness again?  Government employees not getting paid, air traffic controllers not coming to work consistently, SNAP or food stamp benefits delayed, and government economic data suspended were all big negatives.  Republicans are not going to fund insurance companies in the failed Obamacare ACA anymore, they will not extend covid subsidies (covid is over!), and they will no longer pay for illegal immigrants. 

During the shutdown, NASA was busy tracking 3I Atlas, which they call a “comet” streaking across our solar system.  Is it a comet?  Is it an alien spacecraft?  Today, it makes its closest pass to Earth, albeit several hundred million miles away.  We shall see if the ETs send us a message.

Inflation

CPI for November surprised to the downside at +2.7% year-over-year; the core CPI was +2.6%.  CPI typically runs about .50% higher than PCE, upon which the Fed targets are set.  CPI is almost there to its implied target of +2.5%.  However, we only have PCE figures from September, which were +2.8% for the headline and core measures. 

There are plenty of hopeful signs that inflation will be declining in 2026.  Crude oil has fallen from nearly $80 per barrel to $55 this year.  Gas prices broke below $3.00 to $2.90 per gallon now.  Large increases in owners equivalent rent are fading, mainly due to deportations of illegal immigrants.  There is room for improvement in electric and natural gas prices, which rose +4.2% y-o-y, as capacity increases and regulations are reduced.  Food prices are tempering; one example is the cost of a Thanksgiving dinner in 2025 fell -5.2% from 2024 to $55.18.

Affordability is the big political buzzword right now.  The past four years brought us the highest inflation in two generations, from explosive government spending, supply chain issues, and a slow reacting Fed that fueled a spike in the CPI index of +20% between 2021 and 2024.  Expect CPI to continue its decline in annual pace, but it will be difficult to overcome the 20% increase in the level of CPI without deflation.  Focusing on growing real wages will certainly help with affordability.

Housing

Housing inflation is clearly down in this struggling sector.  Recent reports show y-o-y price increases diminishing, including the S&P/Case Shiller at +1.4% in September, FHFA at +1.7%, Moody’s at +2.0%, and existing home median sales prices at +1.2%.  Zillow reports that 53% of homes nationally have lost value in the year ended October, 2025, which is the highest percentage increase since April, 2012.  Prices in the Northeast are stable.  There’s a slowdown in demand, with existing home sales up only +.5% in November.  Inventories remain an issue with scarce supply at 4.2 months’ worth of sales.

Mortgage rates continue their painfully slow decline, with the 30-year rate at 6.21% according to FHLMC.  Monthly mortgage payments are still unaffordable for many potential buyers.  Property taxes in many counties are rising along with prices, and in many cases along with declines in value, adding to the angst of existing and potential homeowners.  Due to the government shutdown, new home sales data is delayed.

Some of my Favorite Economic Indicators

Leading Economic Indicators (LEI)- This Conference Board indicator was released for September and the trend continued to be negative, with September and August each at -.3%, leaving the index at 98.3 (2016=100).  For 36 of the last 40 months, the index has been negative.  Four months registered no change:  July, 2025, May, 2025, November, 2024, and March, 2024.  There was once a time that, when the LEI was negative for over 6 consecutive months, recession would follow 6 to 9 months later.  So what are we to make of this index falling for over three years, continually signaling a recession that never came?   By the way, the yield curve inversion lasted for years, also signaling a recession.  With Federal Reserve easing, $10 trillion of new investment in manufacturing in the US committed, strong stock markets and earnings prospects, and fiscal stimulus in 2026, I don’t see recession coming soon.

Employment- Job growth has been showing weakness for months.  I can’t help but wonder how much of the decline in payrolls is related to deportations/immigration and cuts in government jobs.  Payrolls rose in November by +64,000, fell in October by -105,000, and rose in September by +108,000.  The unemployment rate rose to 4.6% in November from 4.4% in September.  A bad sign is that the pool of available workers is pushing 14 million, currently at 13.967 million.  Job openings are high in October at 7.67 million.  Quit rates fell below 2.0% to 1.8%, possibly showing workers unease about leaving jobs.  Challenger layoffs averaged 92,820 for the three months ended in November.  Wages rose +3.5% y-o-y in November; real wages have been positive for months.

Real GDP-  We have not received 3Q25 data yet, but the Atlanta Fed GDP Now projection is for +3.5%, following +3.8% in 2Q25, and -.6% in 1Q25.  Imports and inventories distorted both 1Q25 and 2Q25, as companies tried to get ahead of tariffs.  Real final sales strengthened to +2.9% in 2Q25 from +1.9% in 1Q25.  For the first time in a long time, the budget deficit is expected to decline as a percentage of GDP which will be slightly negative to growth.  Final tax changes from the OBBB include accelerated depreciation deductions for business investment and this will improve real GDP.  We are still held back by $38 trillion of US government debt, which is 126% of GDP; if greater than 90% for an extended time (since 2009), real GDP is impaired by about one-third.

Productivity- The talk is all AI, all the time.  Yes, AI will increase productivity and efficiency.  GDP can grow strongly without creating inflation if productivity is also strong.  (We witnessed this in the 1990s).  2Q25 productivity was +3.3% after a decline of -1.8% in 1Q25.  Capacity utilization is recently low at 77.4%, so we can afford to increase productive capacity without inflation.  And remember, if productivity meets its long-term average of +3.5%, employers are amenable to passing on 1.5% of it plus an inflation target of 2.0% for total raise of +3.5% without inflationary impacts.

Moody’s Beige Book Index- The index remained positive again in November at 11.1, following October of 13.9 and September at 0.  There were negative readings of -16.7 in July and -5.6 in June.  The latest Beige Book showed four districts increasing modestly, three with no change, and five in decline, including Philadelphia.

M2 Money Supply- M2 continues its upward growth trend at a steady clip on a y-o-y basis, with October at +4.6%, September at +4.5%, August at 4.4%, and year-to-date through October at +4.1%.  Milton Friedman would be pleased that M2 is increasing nearer to the growth rate of nominal GDP, after the Fed allowed M2 to outright decline for 15 months, from December, 2022 through February, 2024, for the first negative growth in M2 since the 1930s.  The velocity of M2 remains at 1.39 for both 1Q25 and 2Q25.  Expect M2 to continue to rise as QT has now ended.

Fed Actions

Another meeting, another rate cut.  That’s three in a row since September for a total easing of .75%, bringing Fed Funds to 3.50% to 3.75%.  The FOMC must have heard my criticism of their anemic GDP projections in September.  They now have raised their GDP projection to +2.3% in 2026.  But, true to form, they project taking two years to reach their inflation targets.  It’s always two years away!  It’s ridiculous!  Thankfully, Powell’s departure is not two years away.  I held to my pledge not to watch his press conferences in October or December and not to watch his BS, doublespeak, and “fog” worries ever again.  This is the same man I called a hero during the covid pandemic but his handling of inflation, QE and QT, and money supply turned me off for good.

The Fed finally ended QT on December 1^st.  They caused trouble in the money markets again by stubbornly refusing to ease enough.  Bank reserves are falling and there was great pressure on short-term funding rates.  SOFR was consistently above the IOR rate.  At the December meeting, they announced they will buy T-Bills as needed to help liquidity in the money markets; first up $40 billion of purchases.

The real Fed Funds rate is now about 1.00% (3.75% less PCE 2.8%).  There’s room to cut more.  Many economists estimate that the neutral rate for Fed Funds is 2.50% to 3.00%.

Year-End

We are almost there!  It will be Christmas before you know it!  We made it through a quarter where we saw:

•            On October 19^th, thieves stole $100 million in jewels from the Louvre
•            Jamie Dimon talking about cockroaches and loan losses
•            On November 12^th, the Philadelphia Mint produced the last penny.  It cost 4 cents to produce 1 cent.
•            A record government shutdown from October 1^st to November 13^th
•            Winter starting early with a snowstorm on December 14^th
•            The navigation of 3I Atlas throughout our solar system
•            Dorothy’s navigation of the Danube River

I wish you and your friends and families a Merry Christmas and a Happy New Year 2026!

I appreciate your support!  Thanks for reading!  DLJ 12/19/25

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Disclaimer: This publication is provided to you solely for educational and entertainment purposes.  The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed.  The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice.  The author cannot provide investment advice but welcomes your comments.