Quarter Turn - 1Q 2025
A look at the quarter ahead, and a recap of the quarter behind us.
Q1 2025 Banking Trends
1. Political Transition Drives Regulatory Turbulence
The return of President Trump to the White House catalyzed sweeping changes across financial regulatory agencies. Michael Barr stepped down as the Fed’s Vice Chair for Supervision, while Travis Hill became Acting FDIC Chair. A sharp deregulatory pivot followed, including withdrawal of proposed rules, agency leadership changes, and staffing purges at the CFPB, OCC, and FDIC. The CFPB has been its own saga, including lawsuits, mass terminations, and attempts to freeze operations. Executive orders mandated greater White House control over independent agencies, spurring legal challenges. Meanwhile, industry groups such as the ICBA and CSBS warned against dismantling the dual banking system.
2. Crypto Regulation and Integration
The deregulatory shift in Washington is reshaping the crypto landscape for banks, regulators, and fintechs alike.
Digital assets gained ground amid a deregulatory wave. The SEC repealed SAB 121, easing balance sheet treatment of crypto custody, and President Trump signed orders supporting the crypto industry, opposing a central bank digital currency (CBDC), and calling for a strategic reserve of digital assets. The GENIUS Act proposed dual oversight—a mixed regime of state and federal regulation—for stablecoin issuers. Yield-bearing stablecoins (like Figure’s YLD token) gained approval. In a major shift, the FDIC and OCC rescinded their requirement that banks obtain supervisory "non-objection" before engaging in crypto-related activities, signaling a more permissive approach. Meanwhile, House Majority Whip Tom Emmer pledged to pass the FIT21 framework before the August recess, further raising expectations for legislative clarity. Major banks signaled readiness to launch stablecoins if a regulatory regime emerges, while crypto exchanges like Binance and Coinbase made headlines for settlements and legal victories.
3. Debanking Takes Center Stage
Regulators came under fire for their historic reliance on "reputation risk"—a supervisory concept critics say was used to justify account closures for politically disfavored clients.
Allegations of political bias exploded into public view, with President Trump, trade groups, and lawmakers arguing that "reputation risk" enabled discrimination against legal businesses and conservatives. Senator Tim Scott introduced legislation to eliminate the concept entirely from supervisory frameworks. The controversy gained momentum through hearings, document disclosures, and lawsuits—including one case filed by the Trump Organization against Capital One.
By the end of the quarter, the FDIC and OCC formally removed "reputation risk" from their examination manuals, stating it would no longer factor into prudential regulation. The Federal Reserve also struck it from its criteria for approving master account access. Together, these moves represented a coordinated effort to narrow supervisory discretion over who has access to the financial system.
4. Credit Outlook Remains Resilient
While pockets of stress emerged in auto lending and cannabis financing, overall credit quality remained stronger than anticipated. The FDIC’s Quarterly Banking Profile showed net charge-offs remained manageable, and nonaccrual and past-due consumer loans were below pre-pandemic averages. Many banks attributed this resilience to tighter underwriting standards and loan portfolio repositioning efforts undertaken in 2023. Analysts remain cautious. Expectations around Fed policy rates and long-term Treasury yields will have a big impact on struggling CRE portfolios.
5. Market Volatility and Interest Rates
Treasury yields gyrated amid inflation, tariff concerns, and uncertainty about the Fed’s policy direction. The 10-year Treasury hit lows near 4.16%, briefly easing pressure on mortgage and CRE markets. The Fed held the fed funds target rate steady, and slowed down quantitative tightening by cutting its monthly redemption cap on Treasuries from $25 billion to $5 billion. Despite a mid-March correction in the stock market, banking indices remained above 2024 lows.
6. M&A Activity Lags, but Optimism Persists
Despite strong optimism in early 2025—fueled by expectations of lighter regulatory scrutiny under the Trump administration—bank M&A volume trailed last year’s pace. Dealmakers cite ongoing uncertainty, particularly around tariffs and antitrust enforcement, as a key factor dampening activity. That said, several transactions did close during the quarter, including strategic community bank mergers and targeted asset sales. The market held out hope that dealmaking will accelerate once macro and regulatory conditions stabilize.
7. Tech and Cybersecurity Focus Intensifies
Cyber risks persisted, with LockBit ransomware updates and debates over threat intelligence sharing following agency budget cuts. AI also loomed large: the emergence of DeepSeek raised concerns about competitive pressures and compliance readiness. Meanwhile, Palantir’s push into banking and the launch of massive AI data centers signaled serious infrastructure investment by incumbents.
8. De Novos and Charter Innovation
Momentum grew behind new bank formations. A coalition of legal and academic stakeholders advocated for easing chartering restrictions, and several new institutions received FDIC approval. Telcoin gained conditional approval as Nebraska’s first Digital Asset Depository Institution (DADI), signaling regulatory openness to charter experimentation.
9. State-Level Regulatory Initiatives
State banking departments asserted themselves as key players in consumer protection and fintech oversight. New York proposed a major update to its consumer protection laws that would expand enforcement authority, cover small businesses, and allow legal action against abusive practices not clearly covered by federal statutes.
States also continued to press the issue of rate exportation. Colorado's new law to cap interest rates on loans to in-state residents is being challenged in court, while Virginia's governor vetoed a proposed ban on fintech lending.
Earned Wage Access (EWA) remains a focus of legislative attention. Several states have passed disclosure and licensing requirements, and Connecticut imposed a usury cap. New York's proposed A258 bill would allow regulators to set a total cost cap, setting it apart from other state approaches.
These trends point to growing divergence between state and federal oversight, with implications for fintechs and their banking partners.
10. Legal and Compliance Developments
The quarter brought a wave of legal decisions that could significantly alter compliance strategies for banks, fintechs, and their legal teams.
In Massachusetts, MountainOne Bank faces a lawsuit over fees despite issuing refunds, underscoring ongoing litigation risk even with customer remediation. In New York, a judge allowed a wire fraud case against Citi to proceed, potentially expanding Electronic Fund Transfer Act protections to consumer wire transfers.
At the federal level, the Supreme Court ruled that not all misleading statements in banking communications are legally false, narrowing the scope of what constitutes a violation under federal law. This decision could reduce liability exposure in cases involving ambiguous or incomplete disclosures from borrowers. Separately, the Court also weighed in on the Corporate Transparency Act (CTA), which requires companies to report beneficial ownership information to FinCEN. Although it lifted a nationwide injunction, enforcement remains paused while further legal challenges unfold.
In addition, two important New Year's Eve rulings in the Serta and Mitel cases reshaped the landscape for creditor-on-creditor violence and the use of uptier exchange transactions. The Southern District of Texas upheld Serta's 2020 deal structure, while a separate court rejected the Mitel transaction as violating the terms of its credit agreement. These split decisions create ongoing uncertainty around debt subordination practices, with potential consequences for distressed credit markets, intercreditor relationships, and documentation standards.
Looking Ahead: Q2 Preview
The first quarter of 2025 was one for the history books—and just 18 days into Q2, it’s clear we’re in for another one. Buckle up.
The outlook for the second quarter is as clear as mud. Much will depend on how tariff negotiations play out around the globe and what early economic data reveals. The good news? Banks are entering this phase on stronger footing. Many restructured their balance sheets over the past few months, giving them more flexibility amid uncertainty.
Recessions are never good for banks, and we should remain vigilant as events unfold—monitoring liquidity buffers, reviewing credit exposure by sector, and stress testing capital adequacy under more adverse economic assumptions. But compared to just a couple of years ago, the industry as a whole is better equipped to weather a few economic road bumps. Research points to a "weak tail" of banks that might struggle in a downturn, and regulators have been monitoring those institutions far more proactively since the 2023 mini-crisis. In theory, this means they will be far better prepared to react to any deterioration in those bank's financial conditions—so long as workforce reductions don't impact regulatory effectiveness.
What to Expect in Q2
Despite the uncertainty, we can expect several key developments in the months ahead:
Permanent leadership at the OCC and CFPB is expected, along with a new Vice Chair for Supervision at the Fed. While surprises are always possible, these appointments will likely bring clearer policy direction—and an acceleration of deregulatory initiatives—before quarter’s end. Unfortunately, tension between President Trump and Fed Chairman Jerome Powell could come to a head during this quarter, injecting new chaos into the regulatory environment.
Federal agencies submitted “Phase 2” Reorganization and Reduction in Force (RIF) plans in mid-April. While implementation deadlines fall in Q3, we could start seeing staffing changes before June.
A stablecoin bill may be signed into law by the end of Q2. The GENIUS Act provides that the law will take effect 18 months after signing or 120 days after the issuance of final implementing regulations, whichever comes first.
Trump’s 90-day pause on reciprocal tariffs delays some of the biggest questions abut the economic outlook until Q3. However, we should see movement on bilateral trade deals and early data from currently active tariffs, which could sharpen the Fed’s view on monetary policy for the second half of the year.
Some of the 188 lawsuits challenging Trump Administration actions may reach the Supreme Court, helping define the limits of executive power.
Elon Musk’s 130-day stint as a special government employee is winding down. Whether he stays, goes, or leaves early is for others to speculate, but the work of the Department of Government Efficiency (DOGE) will continue regardless. Bret Baier’s special report on DOGE is worth watching (fair warning, it’s a 40 minute segment) no matter which political camp you fall into. Musk’s tweets about the agency’s work sometimes come fast and loose, but several of the executives working on DOGE initiatives have clear, well-defined objectives that are already in progress.
All signs point to Q2 being a transitional quarter, but that doesn’t mean banks should cling too closely to the sidelines.
If you’re contemplating entering the crypto space—whether by serving crypto clients or launching related services—now’s the time to start laying internal groundwork. Banks that wait too long may find themselves at the back of the implementation queue as capable crypto partners fill up. Now is the time to evaluate vendors, build internal alignment, and assign ownership for crypto readiness projects.
And while midterm election predictions remain unclear, keep this in mind: if Democrats retake the House, Rep. Maxine Waters is expected to reclaim the House Financial Services Committee gavel. If you’re considering a merger or acquisition that isn’t a 61-day slam dunk (à la Cadence Bank), it’s worth thinking now about your timeline—and how political winds might affect key milestones.