Learn Investing: How Higher Prices and Stagflation Hit Bank Stocks
Because when households feel squeezed, banks start feeling it too.
If you’ve been watching inflation stay stubbornly high, you might assume it’s mostly a consumer problem—groceries cost more, energy bills climb, and vacations get shelved.
But what happens after that?
Well, when households start feeling squeezed, their banks feel it next.
Rising prices and economic uncertainty aren’t just bad for consumers. They can also lead to higher loan defaults, lower lending activity, and weaker profits for banks—especially those that depend on retail borrowers.
And that’s exactly what’s starting to show up in recent data.
Here’s how inflation and stagflation hit the banking sector
1. Rising delinquencies = growing credit risk
When people can’t keep up with rising costs, they often fall behind on their credit card payments or auto loans first.
These are called non-performing loans (NPLs)—or sometimes just “bad loans.” And when NPLs go up, banks have to set aside more money for potential losses.
What to watch:
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Credit card and auto loan delinquency rates
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Bank earnings reports: Watch for rising provisions or write-downs
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Signs of rising household debt burdens in consumer data
Right now, we’re seeing U.S. credit card and car loan delinquencies trending higher, signaling that pressure is building on household budgets.
2. Slower lending = weaker revenue growth
Even with high interest rates, banks don’t make money just by existing. They make money by lending. If people stop borrowing—because they’re uncertain about the future or afraid of higher rates—banks suffer from weak loan growth.
This hits what’s called the net interest margin (NIM), which is the difference between what banks earn on loans and what they pay on deposits.
Why it matters:
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When lending growth stalls, it’s hard for banks to grow profits—even if rates are high
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Small and mid-sized banks that rely heavily on consumer lending are most exposed
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Uncertainty around the economy can stall mortgage growth, auto loans, and business lending
3. Investment banks face a different kind of slowdown
Even for investment-focused banks like Goldman Sachs or Morgan Stanley, the story isn’t much better.
M&A activity (mergers and acquisitions) has slowed down dramatically. High interest rates make deals more expensive. Volatility makes valuation harder. And political or regulatory uncertainty makes CEOs cautious.
As a result, investment banks are seeing lower fees from deals, IPOs, and advisory services.
Quick snapshot:
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M&A volumes are down sharply vs expectations from earlier in the year
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Deal-making tends to rebound only when confidence improves and financing costs fall
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This has already hit earnings at major U.S. and European banks
And what about deregulation?
Some industry leaders (like Goldman Sachs CEO David Solomon) have hinted at optimism around deregulation, especially around capital and leverage requirements. But the pace is slow—and the risks of deregulating too fast are clear.
Case in point: Silicon Valley Bank.
It benefited from looser regulation after 2018—but collapsed in 2023 due to poor risk management.
The lesson?
Deregulation might help short-term margins, but strong risk controls are still essential—and investors are now paying attention to which banks have them in place.
What beginner investors should take away from this
If you’re investing in bank stocks, ETFs with financial exposure, or just tracking the economy, here’s what to focus on:
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Consumer stress shows up in bank earnings — Higher delinquencies = more risk = lower profits
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Loan growth matters — Without it, banks can’t fully capitalize on higher interest rates
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Look beyond just big names — Regional banks can be more exposed to credit risk and deposit outflows
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Regulatory headlines aren’t always bullish — Deregulation can create new risks if it’s not balanced
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Investor confidence is everything — When people lose faith in a bank’s stability, stock prices fall fast (see SVB or Credit Suisse)
When households hurt, banks don’t stay immune
Rising prices don’t just affect grocery bills—they affect loan payments, borrowing behavior, and financial stability
