In 1897, author Mark Twain wrote “The report of my death was an exaggeration” in an issue of the “New York Journal”, a statement made in response to rumors that he was gravely ill and had even died. The widespread rumors stemmed from the sickness of James Ross Clemens, a cousin of Twain’s (whose real name was Samuel Clemens), who ultimately recovered from his infection. Over the years, Twain’s quote, which was eventually altered to “The reports of my death have been greatly exaggerated,” has become a famous idiom that has been used in everything from films to song lyrics.While Twain enjoyed poking fun at the inaccuracy of rumors about his death, the banking industry is finding it far less entertaining trying to interpret premature predictions about the likelihood of a recession in the US over the past few months. As soon as talk within the Trump administration turned to levying sizeable tariffs on foreign nations, there were widespread fears that this could trigger a recession within the US, or possibly even a depression. The Economic Impact of TariffsFollowing multiple stays in executing most of the tariffs that have been announced, however, a recent survey of economists pegs the likelihood of the US facing a recession within the next 12 months at 35%, compared to a 45% probability in April. Still, the possibility of a recession remains — and there are several signs that the US economy is not quite as stable as news headlines would lead people to believe. After the changing of the guard within the White House in January 2025, the new administration has enacted multiple hefty tariffs on the majority of goods imported into the US. In some cases, such as imports of aluminum, steel, and copper from certain countries, tariffs have been raised as high as 50%. While federal courts ruled many of these tariffs to be unconstitutional, following appeals, several of these tariffs remain in effect until legal proceedings ultimately play out. Though the Trump administration asserts that its tariffs will ultimately yield an increase in domestic manufacturing and enhance national security, economists and investors fear that these tariffs, coupled with ongoing high interest rates, could ultimately trigger a recession because of increased costs for businesses and consumers, lost jobs, and increased uncertainty about the economy. On top of all that is the added uncertainty introduced by ongoing regulatory changes, which can heighten the risk of loan delinquencies among borrowers, particularly smaller businesses. Lessons from Past Economic DownturnsWith the possibility of a recession looming, now is the time for community financial institutions (CFIs) to begin thinking about the best ways to weather the storm, should things head in that direction. CFIs can prepare for the possibility of future recessions by looking back at the lessons the banking industry has learned from past economic downturns.
- Assess and strengthen risk management. Regularly review your lending portfolios to spot weaknesses or vulnerable sectors. Update credit and underwriting policies as needed, and use data analysis tools to improve risk assessment and portfolio monitoring.
- Ensure strong capital and liquidity buffers. Make certain your bank holds sufficient capital and liquid assets to withstand downturns in asset markets (such as housing or equities). Regularly stress test your balance sheet, and align capital and liquidity management with current regulatory requirements. Learning from the 2008 financial crisis, staying well-capitalized and maintaining solid liquidity can be the difference between resilience and crisis.
- Monitor and respond to macroprudential signals. Stay alert to regulatory “macroprudential” policies that aim to prevent excessive risk build-up — such as limits on loan-to-value ratios or other restrictions designed to cool overheated markets. When authorities tighten conditions, proactively adjust your lending standards and risk appetite rather than reacting after the fact. This forward-looking, countercyclical approach helps minimize risk and ensure long-term stability.
- Focus on portfolio expertise and diversification. Diversify your lending, but concentrate on sectors where you have deep experience and knowledge. The most resilient CFIs during past downturns were those that stuck to areas they understood best, rather than overreaching into unfamiliar markets.
- Maintain strong loan standards. Don’t lower minimum payment or down payment requirements just to compete. Upholding robust lending standards protects your institution if economic conditions worsen.
- Leverage technology for efficiency and insight. Modernize your technology to streamline processes, cut costs, and improve customer experience. Consider using artificial intelligence and advanced analytics to identify early signs of credit issues, track customer behavior, and swiftly address risks. Keeping your digital offerings up-to-date also helps retain and attract customers who expect modern banking services.
Though economists are not too concerned about a recession in the immediate future, there is still cause for concern, and there are plenty of signs that trouble could be brewing. Amidst ongoing uncertainty, CFIs should be preparing themselves for the worst now so that they are well-positioned if things turn down.
