Economic Report: Banking Industry Approaches 2025 with Cautious Optimism Amid Economic and Regulatory Uncertainty
By Rose Oswald Poels, Wisconsin Bankers Association
As Wisconsin’s banking sector looks ahead to 2025, there is a sense of both optimism and caution among industry professionals. Bankers will be closely watching how national policies under President Trump’s administration may bring much-needed regulatory relief, while remaining mindful of the challenges the economy may continue to pose in the near future.
Overall, Wisconsin’s banking sector remains very strong. Data released by the FDIC shows that Wisconsin banks remained in a healthy position through the third quarter of 2024 (the most recent numbers available as of this writing). Lending held fairly steady or increased in the third quarter of 2024 over the prior year in all categories (commercial, residential, and farm loans), as banks responded to the borrowing needs of their customers. Deposits also increased 3.53 percent year over year, due in part to the high interest rates offered on CDs and money market accounts. Finally, the net interest margin, a key indicator of a bank’s profitability and growth, for Wisconsin banks remained steady at 3.18% in the third quarter which was an increase from the prior quarter (3.14%), but a slight decrease over the prior year (3.19%).
Wisconsin banks are also leveraging investments in technology and innovation to drive growth. Digital banking platforms, mobile payment systems, and AI-powered tools for staff and customers are becoming essential for operational efficiencies as well as for attracting and retaining customers.
Regulatory burden at the federal level remains an ongoing concern for the banking sector. In the new administration, bankers are optimistic that there will be a pause on the introduction of new regulations, allowing the industry to focus on its core business rather than new compliance burdens. In addition, the industry is hopeful that overly burdensome regulations will be rolled back to a more reasonable level. One area of significant concern is the new Section 1071 requirements issued by the Consumer Financial Protection Bureau (CFPB). These rules, designed to collect more data on small business loans, have been criticized by many in the industry for imposing an excessive administrative burden on both the banks and their small business customers. The requirements go far beyond the original intent of the Dodd-Frank Act and could negatively impact small businesses by making access to credit more complicated and costly.
Despite these regulatory hopes, bankers remain cautious about the broader economic landscape. The path to economic recovery is still uncertain and a significant rebound may take longer than expected. The third-quarter data released by the FDIC shows that past-due loans for Wisconsin’s banking sector were elevated year over year (19.30%) as inflation and the high cost of living impacts borrowers. Past due loans were also higher quarter over quarter (6.55%), and the current level of past-due loans remains above recessionary levels.
One area of concern is the current state of the housing market. Mortgage rates are unlikely to drop significantly in the immediate future, and the high cost of housing, coupled with a limited supply, continues to challenge both buyers and sellers. This ongoing imbalance between supply and demand could lead to a slower recovery for the housing market and, by extension, for the broader economy.
Similarly, interest rates for commercial and ag borrowers are unlikely to be dramatically lower in 2025. As a result, loans that will re-price in 2025 could put greater financial strain on some commercial and ag borrowers. A typical duration for commercial and ag loans is a five-year fixed term with a balloon payment due at maturity. As a result, many customers renewed loans in 2024 and will renew in 2025 at interest rates higher than what the borrower had been paying.
For certain agricultural producers, adding to the strain of elevated interest rates is the fact that commodity prices are dropping to multiyear lows. With these decreases, the overall ag economy and farm income outlook continue to weaken.
Ag producers always expect and experience variable farm income; however, large declines in farm income can quickly pressure cash flow and impair debt repayment capacity. As commodity prices retreat from their highs, ag producers are working with their lenders to adjust expenses and update cash-flow projections.
In conclusion, the banking industry is entering 2025 with a mixture of hope and hesitation. While the year may bring incremental changes rather than sweeping transformations, Wisconsin banks remain well capitalized to support the local needs of their customers and communities.
Oswald Poels is president and CEO of the Wisconsin Bankers Association | Founded in 1892, the WBA is the state’s largest financial industry trade association, representing 180 commercial banks and savings institutions, their branches, and nearly 30,000 employees.
