The US economy is expected to experience a slowdown in GDP growth, hovering around 2% in 2025. Simultaneously, the Federal Reserve is likely to reduce interest rates to approximately 3.50% to 3.75% (currently set around 4.25% to 4.5%) as inflation aligns with its 2% target. This evolving economic landscape will bring significant implications across banking, insurance, asset and wealth management, and specialty finance verticals (Deloitte Insights).
Banks
The anticipated rate cuts will shrink banks’ interest income as the spread between deposit and loan rates narrows. To sustain profit margins, banks should prioritize non-interest income streams, particularly by leveraging existing securities with higher coupon rates that are poised to rise in value.
Middle and smaller banks are expected to bear a greater impact than larger banks. Limited liquidity and negotiating power will constrain smaller institutions from securing favorable deposit rates, unlike larger banks that can leverage their reputation to gain advantageous terms. Mortgage activities are set to rise as falling interest rates make home loans increasingly attractive (Deloitte Insights).
Additionally, M&A activity is projected to grow due to cheaper corporate loans enabling businesses to expand and engage in transactions. Consequently, banks could see an uptick in M&A fees. In 2024, global financial M&A fees reached $11.4 billion, a 10% increase from 2023, reflecting 3,680 deals (Financial Times).
The Basel III endgame proposal, introduced in September 2024 and slated for implementation in July 2025, will bring pivotal changes. For GSIB banks (Global Systemically Important Bank), capital requirements are set to increase by an average of 9% compared to the 19% proposed in 2023, translating to a 3-4% long-term increase. Non-GSIB banks will see a modest 0.5% rise. Additionally, banks involved in mortgages will have a reduced capital requirement for mortgage loans of up to 90 percent loan to value. Institutions with assets between $100-$250 billion will be exempt from these requirements unless they face unrealized gains and losses on securities in regulatory capital. These adjustments in addition to a reduced risk weightings for loans acquired for residential real estates and retail customers will provide banks with greater flexibility to allocate capital toward revenue generation (Katten), (Federal Reserve).
Insurance
The personal property and casualty insurance market is facing rising asset prices and heightened uncertainties surrounding potential property damage risks, which are driving premium increases. Premiums are projected to rise by 11% in 2025, exceeding the 9% annual average over the past five years.
Commercial property and casualty insurance continues to face geopolitical, economic, and climate-related instabilities. Despite these challenges, premiums have grown at an average annual rate of 8% over the past five years. However, rising premium rates have sparked customer dissatisfaction, compelling insurers to innovate and diversify their product offerings to improve profitability. Leveraging on the surge in artificial intelligence will allow insurers to design products tailored to the AI space, expanding their market and addressing emerging risks associated with AI adoption.
Life and retirement insurance, meanwhile, is growing slower than GDP. To address this, insurers should capitalize on the aging global population by bundling health and life insurance products, thereby improving profitability and meeting evolving customer needs (McKiney Outlook).
Wealth and Asset Management
Investors are expected to diversify their portfolios to reflect economic conditions and the policies of President-elect Donald Trump, who has emphasized reducing corporate taxes, increasing tariffs, and deregulation. High-net-worth individuals are likely to take advantage of the lifetime gift and estate tax exemption, set at $13.99 million per individual in 2025, to minimize estate tax liabilities (Charles Schwab Outlook).
Despite favorable tax and interest rate cuts, declining inflation, and a tight labor market, investors are expected to focus on long-term strategies rather than short-term gains.
Specialty Finance
Specialty finance transactions are poised for significant growth in 2025, fueled by rising U.S. consumer non-housing debt, which now exceeds $5 trillion. The need for banks and specialty finance funds to engage in substantial risk transfers will also drive activity.
To align with Basel III endgame requirements, traditional banks are expected to collaborate with specialty finance funds to reduce credit risk. Additionally, restrictions placed on traditional banks under the new framework will create opportunities for specialty finance funds to bridge the gap, expanding their market presence and scope (Cambridge Associates Outlook).
In conclusion, the Desir Research Group anticipates a stable economic framework, with financial services players expected to innovate and develop new products that align with emerging trends to enhance profit margins.
Work Cited
Deloitte Insight
Katten. 2024. Basel III Endgame: Will Banks Have to Increase Their Capital Requirements?
https://katten.com/basel-iii-endgame-will-banks-have-to-increase-their-capital-requirements
Federal Reserves News and Events. 2024. The Next Steps on Capital Vice Chair for Supervision Michael S. Barr
https://www.federalreserve.gov/newsevents/speech/barr20240910a.htm
Financial Times League Tables.2024.
https://markets.ft.com/data/league-tables/tables-and-trends/mergers-and-acquisitions
McKinsey. Global Insurance Report. 2024.
Charles Schwab. Planning and Wealth Management Outlook. 2025. https://www.schwab.com/learn/story/financial-planning-outlook
Cambridge Associates. 2024. Credit Market Outlook. https://www.cambridgeassociates.com/insight/2025-outlook-credit-markets/#:~:text=US%20Specialty%20Finance%20Transaction%20Volumes%20Should%20Increase%20in%202025&text=With%20US%20consumer%20non%2Dhousing,non%2Dbank%20lenders%20is%20expanding.
Desir Research Group 