Banks as the Big Winners in a Rising Credit Risk Environment

In the wake of the 2023 regional bank crisis, the financial landscape has undergone a seismic shift. Banks are no longer merely reacting to rising credit risk; they are proactively repositioning themselves to capture risk premiums in a volatile environment. This strategic evolution, driven by lessons from the 2023 turmoil and regulatory reforms, has positioned certain institutions to thrive where others faltered.

Strategic Positioning: The New Imperative

The 2023 crisis exposed critical vulnerabilities in liquidity and capital management, particularly for banks reliant on uninsured deposits. Midcap banks with diversified, granular retail deposit bases, however, demonstrated resilience. According to a McKinsey report, institutions with above-median retail deposits (over 42% of total deposits) achieved net interest margins (NIMs) of 3.46% in 2024, compared to 3.02% for peers (a McKinsey report). This stability stems from customer inertia and the diversification inherent in retail deposits, which mitigate large-scale outflows. For example, banks like New York Community Bank and First Citizens Bank leveraged their retail-focused models to acquire failed institutions like Signature Bank and Silicon Valley Bank, respectively, transforming crisis into opportunity, as described in an FDIC review (an FDIC review).

Chief risk officers (CROs) now play a central role in strategic decision-making, with 82% of surveyed CROs acknowledging the banking industry's unpreparedness for the "speed of risk" during the 2023 crisis, according to Oliver Wyman's 2025 CRO outlook (Oliver Wyman's 2025 CRO outlook). Institutions are integrating risk management into broader strategy, using scenario analysis and early warning systems to anticipate shocks. For instance, one bank adjusted its commercial real estate loan concentration using real-time data, avoiding a potential 5% capital loss ahead of a market downturn, the report notes.

Risk Premium Capture: Balancing Profit and Prudence

Banks are innovating to capture risk premiums while maintaining stability. Profit-based underwriting models in credit card portfolios, for example, assess account-level profitability rather than relying solely on risk scores. While this approach increases risk in lower-credit-spectrum portfolios, it allows banks to optimize returns in high-end transactor segments, as shown in a profit-modeling study (a profit-modeling study). Regulatory reforms, such as aligning capital requirements with unrealized losses on securities, further enable risk-adjusted returns by ensuring adequate buffers, the FDIC review also notes.

The Federal Reserve's Bank Term Funding Program (BTFP) during the 2023 crisis exemplifies how liquidity tools can stabilize markets while allowing banks to recalibrate risk exposure, according to a Richmond Fed analysis (a Richmond Fed analysis). By 2025, noninterest income is projected to reach 1.5% of average assets, driven by investment banking fees and asset management, offsetting declines in net interest income, per Deloitte's 2025 outlook (Deloitte's 2025 outlook).

Metrics and Resilience: A Data-Driven Edge

Financial metrics underscore banks' adaptability. Despite NIMs dropping to 3% by 2025 due to rising deposit costs, efficiency ratios are expected to stabilize around 60% as technology investments streamline operations, according to bank performance metrics (bank performance metrics). Credit quality, though deteriorating slightly, remains robust: the 2025 net charge-off rate of 0.66%-the highest in a decade-is still far below the 2.6% peak during the 2008 crisis, per Federal Reserve data (Federal Reserve data).

The Path Forward: Governance and Innovation

Corporate governance reforms are critical. The absence of a CRO at Silicon Valley Bank for eight months prior to its collapse highlights the need for board accountability, as a Harvard Law article highlights (a Harvard Law article). Banks are now prioritizing long-term debt requirements and enhanced resolution planning to absorb losses, lessons drawn from the 2008 crisis the FDIC review details.

For investors, the key lies in identifying institutions that balance innovation with prudence. Midcap banks with strong retail deposit bases, agile risk frameworks, and proactive governance are best positioned to capitalize on rising credit risk while maintaining resilience.

Conclusion

The 2023 crisis was a wake-up call, but it also revealed opportunities for banks that adapt. By embedding risk management into strategy, leveraging technology, and aligning with regulatory reforms, banks are not just surviving-they are thriving. For investors, the message is clear: strategic positioning and disciplined risk premium capture are the cornerstones of long-term value creation in an era of uncertainty.