2025 banking and capital markets outlook

• Trump’s new world order and MAGA policies are creating a new form of ‘trickle down economics’ in global markets, affecting stock indices, inflation, interest rates and regulation.
• At the start of 2025 inflationary pressures had largely subsided, yet by February the Trump Administration had introduced fresh uncertainty around interest rates driven largely by tariffs and potentially ‘transitory’ inflation, with Federal Reserve policymakers weighing the risks of slowing growth against concerns over higher prices. Tariff flip flops kept them on their toes, in a broader environment of continuing geopolitical shocks.  
• The conceptual Mar-a-Lago Accord requires banking leaders to consider the implications of a weaker dollar, increased volatility, shifts in investment flows, potential for trade disruptions, impact on US borrowing costs, and international cooperation.
• In this environment, banks are focusing on protecting their balance sheets, financial resources, customers, and regulatory position, while monitoring geopolitical risks, stress testing and risk management.
• In Europe, the European Central Bank (ECB) cut interest rates again in Q1 2025 by a ¼ point, warning that trade war fears were harming Europe’s economy, while in The Guardian UK newspaper, ECB President Christine Lagarde blamed a “high level of trade and policy uncertainty” for a downgrade in growth this year.
• Cascading risks to the global financial system from macroeconomic volatility, geopolitical tensions and financial fragmentation, have put the World Economic Forum into safeguarding mode.  
• The WEF Banking and Capital Markets Community¹ has defined the following strategic priorities for the year ahead: Financial Stability, Artificial Intelligence, and Transition Finance:
• • Financial Stability - safeguarding the global financial system amid an era of cascading and interconnected risks. 
  • Artificial Intelligence - collaborating with the public sector to build resilience in light of tech innovations impacting the sector, notably AI, non-bank financial institutions (NBFI), and increasing cyber threats.
  • Transition Finance - mobilising market forces and public policy to catalyse investment in ‘brown’ infrastructure at the outset while building credible transition plans with robust interim targets to accelerate climate adaptation and mitigation financing.
• While financial stability and AI are almost ‘table stakes’ for sector survival, transition finance is perhaps broader. With more than 8 billion people on the planet, and a global population expected to rise to 9 billion before 2040², resource depletion (and the funding of it) connects banking to every sector. Reminiscent of mindfulness, the WEF estimates that a ‘nature-positive economy’ could generate more than US$10 trillion in new annual business value, resulting potentially in new financial markets and products to enable new capital flows. Mindfulness may turn ‘grey sky thinking’ into ‘blue sky thinking’.
• As the world faces ongoing economic, financial and political turmoil, the delayed Basel III Endgame (B3E) is due to take effect on the proposed date of 1st July 2025, with a multi-year phase-in period. As banks grapple with market complexity, they await details on a major shift to the current regulatory capital regime, particularly in the US, ushering in higher capital requirements that will potentially impact profits in an already pressurised environment.
• Banks already face a fundamental challenge in attaining sustainable growth, with bank leaders facing tough choices. In a lower-growth, lower-rate environment, with volatility driving higher capital costs, banks are laser focused on rebuilding foundations for sustainable growth. Optimists see B3E as an opportunity to modernise capital infrastructure by leveraging tech, driving agility and addressing inefficiencies in order to lower operating costs.
• From a tactical perspective, while corporate borrowing is expected to remain stable, if macroeconomic and political uncertainty recedes, an uptick in debt issuance and M&A could offset lower interest income and bearish consumers.
• The Trump Administration is expected to be more open to banking sector M&A and to relax US banking regulations. This will give European banks a greater sense of urgency in strengthening their competitive positions, looking at consolidation to improve efficiency and profitability. This reflects the faster cycle in tactical and strategic decision-making, particularly around acquisitions to achieve cost synergies in a consolidating market.
• Overall, despite expectations that cross-border financial links will grow more slowly, according to think tank Chatham House, the world economy is ‘fracturing rather than de-globalising’. Global flows of goods, services and capital are not expected to shrink in total, and in some areas integration may deepen.

Read more on the topic: 

• Bloomberg: Trump’s trade war reignites Fed’s ‘transitory’ inflation question
• The Guardian UK: European Central Bank cuts interest rates again
• WEF Banking and Capital Markets Community
• Deloitte centre for financial services
• Deloitte: What role does the banking sector play in transitioning to a nature-positive economy?
• EY: Basel III Endgame: what you need to know
• Deloitte: 2025 banking and capital markets outlook
• Bain: Financial services M&A report 2025
• IBM 2025 global outlook for banking and financial markets
• KPMG 2024 Banking CEO Outlook
• Chatham House: Donal Trump Presidency
• PwC: Next in banking and capital markets 2025

¹ The WEF Banking and Capital Markets Community consists of approximately 112 banks, ratings agencies, financial services, insurance companies and stock exchanges
² Source: Statista