From Tariffs: Tighter Credit, Slower Growth, and a New Normal

As banks scramble to determine how tariffs could affect the creditworthiness of individual business borrowers, their potential to weigh down an economy that was already showing signs of weakness could also pose challenges for financial institutions. This week, we’re returning to our conversation with economist John Silvia for more on how banks might respond in the current environment—and what comes next. Here are some key takeaways: 

Start triaging before delinquencies spike.  Leading indicators like jobless claims and consumer sentiment indexes from the University of Michigan and the Conference Board have recently been flashing recession warning signs. Silvia, founder of Dynamic Economic Strategy and formerly chief economist at Wells Fargo, also pointed to the NFIB’s recently released Small Business Optimism Index for March, which showed a drop in hiring and pricing plans. “That’s key,” he said. 

Silvia’s advice: proactively assess your loan book under the assumption that top-line growth will slow.  In a slower-growth, higher-cost environment, more borrowers will face margin pressure. Even if defaults aren’t happening yet, the squeeze may already be starting. Silvia said he would not expect a spike in problem loans to start showing up in bank earnings reports until the third quarter of this year. 

Community banks need to be especially cautious. While larger institutions are adding to commercial and consumer banking results with revenue from trading desks (see “What We’re Reading” below), Silvia said smaller lenders don’t have that fallback. “It’s tough for community banks,” he said. Without access to Wall Street-style operations or M&A opportunities, “it's not a good scenario.” These banks will need to lean heavily on fundamentals—careful monitoring, strong relationships, and early action. 

Expect a reset, not a rebound. Even amid the tariff talk and turbulence, Silvia believes the economy will eventually stabilize in the coming months. “Companies adjust. Countries adjust,” he said, adding the same about exchange rates, interest rates, and equities. “They’ll find a new equilibrium again.” But if tariffs stay in place at a level that’s higher than the historical norm, that equilibrium will be at a slower pace of growth, bringing structurally higher costs and tighter credit conditions. 

“There are a lot of segments of the U.S economy that are going to continue to struggle,” he said, and create knock-on effects for any business or community connected to those segments. “The fingers of the export-import business stretch into just about every sector of the U.S. economy,” Silvia said. “There’s no way around that. If Michigan is having trouble with the auto industry, then I am sure every retailer in that region is going to have problems.” 

For banks, in Silvia’s view, similar narratives nationwide could mean reassessing projections, tightening underwriting, and preparing for more challenges in borrower relationships.