Banks cash in on chaos

JPMorgan Chase, Goldman Sachs, Morgan Stanley and Citigroup reported fourth-quarter results with a familiar split. Net interest income stalled as spreads narrowed. Trading desks, meanwhile, made record revenues out of the year's macroeconomic mess.

Why lending income stalled

The squeeze on lending margins follows directly from the Federal Reserve's rate cuts. The central bank lowered its policy rate by a full percentage point in the final months of 2024 and by another three-quarters of a point between September and December last year. Much of what banks earn on loans is tied to floating rates, which reset downwards almost immediately. What they pay on deposits falls more slowly, because banks cut rates for savers cautiously to avoid losing customers, and many large corporate depositors negotiate their own terms. Competition for deposits has stayed intense, since money-market funds, which pass changes in short-term rates through to savers almost at once, held record assets through the year. The gap between the two, which drives net interest income, therefore narrowed as rates came down.

Loan growth offered little compensation. Companies facing uncertainty over tariffs held off on borrowing for new investment, and many larger borrowers found cheaper money in the bond market or from private credit funds, which have taken a growing share of corporate lending over the past decade. Commercial real estate lending remained constrained by weak office values.

Volatility pays the traders

The swings of 2025, from tariff decrees and sudden truces to 50-basis-point moves in bond yields and the 43-day federal shutdown, stalled corporate dealmaking and squeezed lending margins. Fixed income, currencies and commodities (FICC) desks did well out of it. Volatility on that scale widened bid-ask spreads and brought in heavy client volume, as companies rushed to hedge currency and interest rate risk.

The mechanism rewards the biggest dealers most. When markets are calm, clients trade less and competition compresses the spread a dealer earns on each trade. When prices jump, pension funds, asset managers and corporate treasurers all need to rebalance or hedge at once, and they turn to the banks with the largest balance sheets and the deepest inventories. A dollar that fell sharply over the year, a Treasury market that sold off during the April tariff turmoil and commodity prices whipsawed by trade policy all produced exactly that kind of demand. Equity desks benefited too, from heavy trading and from lending to hedge funds through prime brokerage, which grows with the leverage and activity of their clients.

Earnings of lower quality

Markets revenue helped the banks beat forecasts by billions. Equity analysts are less impressed, because trading windfalls depend on deals that may not recur. They do little to offset the slow decline in commercial lending and in investment banking fees.

Investors apply lower valuations to trading income for a simple reason: it is hard to forecast. Net interest income from a stable deposit base and fees from wealth management recur year after year, and markets reward them with higher price-to-earnings multiples. A quarter that owes its strength to volatility says little about the next one, and a bank whose profits lean more heavily on trading tends to trade at a lower multiple of its book value than one with steady fee income.

When the windfall faded before

The pattern has a clear history. In 2009, the year after the financial crisis, trading desks enjoyed enormous revenues as spreads widened and competitors disappeared, and several large banks reported record results. Revenues fell back over the following years as markets calmed and regulation tightened. The same thing happened after the pandemic: trading boomed in 2020 and early 2021, then declined as volatility subsided. On both occasions, banks whose earnings had leaned most heavily on trading saw their share prices lag once the tide turned.

The case for a better balance

There is a more optimistic reading. The Fed's cuts lowered short-term rates while long-term yields stayed high, so the yield curve has steepened. Banks borrow short and lend long, and a steeper curve should eventually widen margins as deposit costs catch up with lower policy rates. Dealmaking also picked up in the second half of the year, with a return of very large mergers, which should feed through to advisory fees as those transactions close. Regulators have spent the year softening proposed capital requirements, which frees balance sheet for lending.

That reading may prove right over time, but it describes a recovery that has not yet arrived. Advisory fees are usually paid when deals complete, which can take a year or more for transactions that need antitrust approval. The benefit of a steeper curve builds gradually as loans and securities reprice. In the meantime, the fourth-quarter numbers rest on trading.

Winners and losers

The split is widest between the large universal banks and the regional lenders. The four banks reporting this week have trading businesses large enough to offset weaker lending. Regional banks, which depend far more on net interest income and on commercial property loans, have no such cushion, and their shares were shaken in October by fraud-related losses disclosed by a couple of lenders. Among the large banks, those with the biggest wealth-management franchises, whose fees rise with asset prices, stand on the firmest ground.

What to watch

The signals worth tracking are the weekly Federal Reserve data on bank lending, which will show whether loan growth picks up; the pace of announced and completed mergers; and measures of market volatility in bonds and currencies. The Fed's decisions on rates will set the path for net interest income, and first-quarter results in April will show whether trading held up.

The big banks did very well out of 2025's policy chaos. When volatility fades, probably within a year or two, they will need lending and advisory work to recover, and there is little sign of that yet. If the Supreme Court's tariff ruling and a new Fed chair bring calmer markets by the summer, expect trading revenues to fall back first, well before lending and advisory income have recovered enough to replace them.