As Interest Rates Settle into a New Range, 2025 Presents Three Key Challenges for Banks
Falling interest rates and decelerating economic growth are forcing institutions to rethink traditional business models. While large banks appear well-positioned to weather these changes, regional players face heightened challenges from compressed margins and commercial real estate exposure.
By Garret Reich, Senior Project Manager at The Financial Brand
The report: 2025 Banking Industry Outlook
Source: Deloitte
Why we picked the report: With the interest rate environment in flux in 2025, banks need forward-leaning guidance on strategy and operations in this new normal.
Executive Summary
The U.S. banking industry is bracing for a transformative year in 2025, with falling interest rates and modest economic growth creating both challenges and opportunities. As inflation cools, the Federal Reserve considers additional rate cuts and the country settles in for a different president in office, banks will need to prep for a complex landscape. Traditional profit drivers like net interest income may come under pressure while new revenue streams emerge from areas like wealth management and investment banking.
The industry’s resilience will be tested as it adapts to this lower-rate environment while managing rising costs and normalizing credit quality. Large diversified banks appear better positioned to weather these changes, while regional banks may face greater hurdles, particularly those with significant commercial real estate exposure. However, opportunities exist for institutions that can successfully leverage artificial intelligence, modernize their technology infrastructure — and find innovative ways to boost non-interest income.
Key Takeaways:
- U.S. GDP growth is expected to decelerate to 1.5% in 2025 as consumer spending moderates and business investment weakens
- Bank deposit costs are forecast to remain elevated at 2.03% even as interest rates decline, squeezing net interest margins
- Investment banking and wealth management revenues may provide bright spots as M&A activity and market conditions improve
- Total consumer debt has reached an all-time high of $17.7 trillion, potentially leading to higher credit delinquencies
Why we liked the report: The report did a great job providing healthy amounts of context that’ll be important for strategic growth-oriented bankers to know. But, arguably more importantly, it had clear "next steps" for strategic growth-oriented bankers to take in 2025.
Why we didn’t: The report was laid out in a way conducive for an information dump, but not designed with the human eye in mind. It jumps a bit and looks more like a browser printable view than a report designed for a PDF download.
The Macroeconomic Picture
The U.S. economy is expected to experience a significant slowdown in 2025, with GDP growth forecasted at 1.5% in Deloitte’s baseline scenario, down from an estimated 2.7% in 2024. This deceleration comes as consumer spending moderates and unemployment inches higher. While a recession appears unlikely, there remains a small probability that growth could slow to just 1% if inflation proves stubborn and geopolitical tensions escalate.
The strength of American consumers — who have been a crucial driver of economic growth — will face a more serious test in 2025. Consumer debt has reached an unprecedented $17.7 trillion, and pandemic-era excess savings were depleted by March 2024. These factors, combined with potentially weaker employment conditions, could significantly impact consumer spending patterns and loan demand.
Perhaps one of the biggest drivers of these trends comes down to the decisions happening in the Federal Reserve, which is expected to cut interest rates three to four times in 2025 — particularly as inflation approaches the 2% target. These cuts would bring the federal funds rate to between 350 and 375 basis points. The yield curve — which has been inverted for nearly two and a half years — may finally normalize as short-term yields fall faster than long-term rates.
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Deposit and Revenue Challenges
Banks face a complex deposit environment in 2025. Even as rates decline, funding costs may not decrease proportionally. Industry analysts project deposit costs to remain elevated at 2.03%, significantly above the previous five-year average of 0.9%. This dynamic could compress net interest margins to around 3% by year-end.
On the other hand, loan demand could vary. Mortgage activity might increase as rates drop, but consumer loans will more likely than not see sluggish growth due to financial pressures on households. Corporate borrowing is anticipated to remain stable, with potential upticks in debt issuance and M&A activity if economic uncertainty subsides.
As interest income faces pressure, banks are likely to focus more on fee-based revenue streams. Investment banking could see renewed strength from increased M&A activity and debt issuance. Some institutions are already seeking higher fees for services like fairness opinions and deal-related advisory work.
Wealth management presents another growth opportunity, though firms must navigate fee compression and increasing competition. Banks are expanding their wealth management offerings beyond traditional investment advice to include services like tax planning, estate planning and long-term care guidance. The market remains underpenetrated, with top banks holding only about 32% of the total wealth management market globally.
Payment processing and card revenues face both opportunities and challenges. While transaction volumes continue to grow, margins are under pressure from technological disruption and regulatory scrutiny. Banks are responding by developing new revenue streams through value-added services and expanding into emerging payment channels.
Credit Quality and Risk Management
Credit quality is expected to normalize in 2025, with delinquencies and charge-offs increasing modestly from 2024 levels. Consumer loans, particularly credit cards and auto loans, may see rising delinquencies as household finances come under pressure. Credit card loans already show the highest 90+ day delinquency rate among all loan categories at 1.69%.
The commercial real estate sector remains a significant concern, especially for regional banks. Properties in the office segment face particular challenges due to changing work patterns post-pandemic. Banks with assets between $10 billion and $100 billion have the highest commercial real estate exposure relative to risk-based capital at 199%, compared to just 54% for banks with assets exceeding $250 billion.
Banks are accelerating their technology investments, particularly in artificial intelligence and core system modernization. According to industry research, AI could boost global banking industry profits by 9% over the next five years, potentially reaching $2 trillion by 2028.
However, many institutions face challenges in scaling their AI initiatives. Only about one-quarter of banking respondents in a recent survey indicated their data management platforms are highly prepared to adopt generative AI tools. Technical debt and legacy infrastructure continue to pose significant barriers to technological advancement.
Cloud migration represents another critical technology priority. Banks are increasingly adopting a financial operations approach to manage cloud costs while maximizing returns on their investments. This includes tracking unused resources, identifying commitment-based discounts and determining when resources should be moved back on-premises.
Cost Management Imperatives
Rising expenses remain a significant challenge for the industry. Compensation costs continue to climb, driven by competition for technology talent and performance-based rewards in revenue-generating businesses. Among banks with more than $10 billion in assets, compensation expenses grew 4.1% year over year to $149.6 billion in the first half of 2024.
Regulatory compliance costs are also increasing. A recent study indicated that financial crime compliance costs have risen for 99% of financial institutions in the United States and Canada, reaching $61 billion. This includes spending on technology software, infrastructure and updates to manage regulatory expectations.
The industry’s efficiency ratio is expected to hover around 60% in 2025, highlighting the ongoing challenge of managing expenses while maintaining necessary investments in technology and talent. Banks will need to find sustainable ways to reduce costs without compromising their ability to compete and grow.
The banking industry’s ability to navigate 2025’s challenges will depend largely on how well institutions can diversify revenue streams, manage costs and leverage new technologies. Large diversified banks appear better positioned due to their multiple revenue streams and stronger brand presence, which may allow them more flexibility in adjusting deposit rates.
Regional and midsize banks may face greater challenges, particularly in modifying deposit rates and managing concentrated exposures to troubled sectors. However, opportunities exist for banks of all sizes to strengthen their competitive positions through strategic investments in technology, talent and customer experience.
Editor’s note: This article was prepared with AI language software and edited for clarity and accuracy by The Financial Brand editorial team.
