How right were bankers’ predictions about 2024?

As 2024 ends, bankers’ predictions for what would happen this year to community banks, digital assets, and regulation have largely held true, with some nuances. Community banks, initially impacted by delayed Fed rate cuts, saw a rebound by mid-July, with stocks recovering and net income rising despite challenges in commercial real estate. Continued growth is anticipated as interest income opportunities expand. Stablecoins gained traction, especially in cross-border payments, but regulatory uncertainty in the U.S. persisted. Bipartisan efforts, such as the stablecoin bill, have advanced, with analysts hopeful for a more crypto-friendly regulatory environment under the next administration, potentially driving further innovation. The crypto market remained in a holding pattern amid ongoing legal battles, with predictions that more clarity may come in 2025. Additionally, the U.S. elections have ushered in an administration likely to deregulate financial services, signaling potential shifts in financial policies, including key banking regulations. Meanwhile, banks have significantly increased tech investments, particularly in AI, data analytics, and cybersecurity, with expectations that these efforts will enhance efficiency, despite not yet yielding major returns.

Prediction: Community bank stocks could rally in 2024

Heading into 2024, community banks had strong credit quality and healthy profitability, positioning them to benefit significantly from potential Federal Reserve rate cuts. However, the cuts didn’t come as soon as investors had hoped, and the stocks eased at the start of the year. The Nasdaq OMX ABA Community Bank Index recovered around mid-July and ended the year up about 13%.

Community bank performance in 2024 has been a complex story. The Fed eventually began to lower rates in September, ending the cycle of post-pandemic tightening. Net interest margins at community banks are healthy and are expected to continue to expand as they benefit from higher-yielding loans, although some institutions have faced elevated loan losses due to commercial real estate challenges. 

Smaller banks saw positive performance in the third quarter of 2024, with net income increasing both from the prior quarter and a year ago. Year over year, community banks’ net income rose by $260.1 million, or 3.9%, largely due to increased net interest income, according to the Federal Deposit Insurance Corp. 

Challenges remain, however, particularly with commercial real estate exposure. Past-due and noncurrent loan balances increased across all major loan portfolios at community banks in the third quarter. At the same time, however, the third-quarter past due and nonaccrual rate remained 36 basis points below the pre-pandemic average of 1.5%.

Outcome: True

Prediction: Major players will drive stablecoin innovation

Stablecoins were predicted to experience significant growth and integration into consumer platforms this year, extending their use beyond cryptocurrency investors. Industry participants forecasted that stablecoin networks could become critical financial structures globally. Accounting for one-third of crypto user activity, they regularly see hundreds of billions in monthly trading volume, from global commerce to safe-haven assets in regions grappling with inflation and limited banking infrastructure. 

Stablecoin adoption for payments is accelerating, driven by companies like Ripple, MoneyGram, and FV Bank, which are targeting the inefficiencies of cross-border transfers. Analysts also expected mainstream payment platforms like PayPal to be a major player with its PayPal USD dollar-back asset. Stablecoins, with a market cap of $200 billion and projected to double by 2025, offer faster and cheaper alternatives to traditional methods. 

Patrick Haggerty, senior director of Klaros, notes that digital assets seeking to go mainstream may have a ripe opportunity heading into the next year. 

“As crypto reestablishes its connections to regulated banks and payments infrastructure, after being pushed out under the Biden administration,” he said. “Projects seeking to meld digital assets and mainstream finance will reemerge, allowing consumers and businesses to use digital assets for a broader range of economic activity.”

A bipartisan stablecoin bill, spearheaded by Reps. Maxine Waters, D-Calif., and Patrick McHenry, R-N.C., emerged this year as one of the most promising legislative efforts amid competing proposals. With the ongoing regulatory focus on cryptocurrencies, stablecoin legislation has been viewed as the most practical starting point for modernizing U.S. laws to address the complexities of digital assets.

However, regulatory uncertainty remains a major challenge in the U.S., with questions around the collateral backing stablecoins and the absence of a clear framework. The kind of regulations adopted in the European Union, requiring stablecoin issuers to obtain licenses and demonstrate sound governance, have yet to be finalized here at home. Stablecoin legislation has been viewed as close to fruition for years now, and yet nothing has received a floor vote. 

Arkansas Rep. French Hill’s appointment as chairman of the House Financial Services Committee marks a potentially pivotal moment for advancing stablecoin legislation. With his extensive background in digital assets — including chairing the House body’s Subcommittee on Digital Assets — Hill’s leadership is expected to provide momentum for crafting a “fit-for-purpose” regulatory framework that balances innovation and oversight. 

Between a more crypto-friendly administration and Hill’s leadership, industry expert Adam Shapiro, partner and co-founder of Klaros, expects some regulatory clarity in the next administration.

“The SEC will provide a path to paying interest on stablecoins,” Shapiro predicted. “Which is a potential gamechanger for stablecoins as a store of value.”

Outcome: True

Prediction: The crypto market will remain largely in suspense regarding its regulatory future into next year.

At the outset of the year, American Banker’s research predicted that in the absence of regulatory clarity for cryptocurrencies, market regulators like the SEC and CFTC will continue focusing on major crypto players. The outcome of ongoing legal battles, including the SEC’s case against Ripple, and actions against Coinbase, Binance, and Kraken, may offer the industry some clarity on whether tokens qualify as securities or commodities. However, regardless of the rulings, the crypto market will likely remain in suspense regarding its regulatory future into 2025.

President-elect Donald Trump’s deregulatory push has sparked both optimism and concern among bankers. He has promised to make the U.S. a global leader in crypto, with his plans to appoint pro-crypto regulators already underway. Trump appointed venture capitalist David Sacks as his “AI and crypto czar,” tasked with leading efforts to make the U.S. a global leader in artificial intelligence and cryptocurrency. Sacks, a prominent investor in AI and blockchain, is expected to advocate for lighter government restrictions, offering more clarity for the crypto industry and fostering collaboration between banks, fintech, and digital asset companies.

As Adam Shapiro, Partner and Co-Founder of Klaros notes, the push forward could bring up tough conversations and fissures between various crypto factions, as their shared opposition to the Biden regulators falls away. 

“Tensions in the crypto industry on regulation will resurface as the common enemy of the Biden Administration fades into the rear-view mirror,” Shapiro said. “The main faultline will pit those who value regulatory certainty and clear standards against those who emphasize minimizing crypto regulation.” 

Outcome: True

Prediction: The presidential contest will usher in a new crop of regulators affecting financial policy across the board.

The 2024 U.S. elections have set the stage for a major shift in banking regulation, as in addition to Trump retaking the White House, Republicans gained control of both the Senate and the House. 

This change is particularly significant for financial markets, as the leadership of key committees will be shaped by figures who advocate for a deregulatory approach. South Carolina Republican Tim Scott’s expected role as Senate Banking Committee Chair and French Hill’s leadership of the House Financial Services Committee signal they’ll apply a concerted — though in both cases, pragmatic — push to ease regulatory burdens on the banking sector. The focus is likely to shift toward reducing capital requirements and reevaluating regulations stemming from the Basel III endgame framework. This could lead to a more favorable environment for banks, with less stringent rules on capital reserves and risk management.

Moreover, the appointment of pro-deregulation figures to key financial regulatory positions under Trump is poised to further reshape the regulatory landscape. Travis Hill is likely to head the FDIC, while the Treasury Department is poised to be led by financial industry veteran Scott Bessent. The leadership of the Office of the Comptroller of the Currency remains uncertain but is expected to align with Trump’s deregulatory stance. 

Questions loom as to whether the President can shake up the Federal Reserve leadership as well. Federal Reserve Chair Jerome Powell says that neither he nor other central bank officials can be removed or demoted by the president without just cause. The Banking Act of 1935 protects Fed governors from removal without cause, but does not specify removal procedures for the chair or vice chair positions, creating ambiguity. This gap could allow Trump to try to remove Powell and Barr from their titles, potentially triggering a legal conflict between the White House and the Federal Reserve.

Outcome: True

Prediction: Banks in 2024 will prioritize increased tech investments, focusing on AI, data analytics, cybersecurity and mobile app enhancements.

American Banker predicted banks and financial institutions would prioritize technology investments in 2024, focusing heavily on AI, data analytics, and cybersecurity to adapt to challenges like bank failures, interest rate shifts and rising fraud. At the outset of the year, around 75% of firms planned to increase tech budgets, with AI and machine learning leading as tools for fraud prevention and customer service. 

American Banker’s surveys reveal that “change the bank” initiatives — those focused on transforming banks by modernizing technology and enhancing customer experiences beyond maintaining existing systems — still often account for less than half of total tech spending.

Banks have been significantly ramping up their technology investments this year, though much of that spending has been on infrastructure modernization and risk management, two initiatives which have not yet resulted in revenue growth. While McKinsey estimates AI and analytics adoption could generate $200–$340 billion globally, banks may not see such returns for some time.

Banks have made strides in areas like digital banking expansion, AI integration, and tools for improving credit underwriting and cybersecurity. However, many still struggle to demonstrate a clear return on investment. Analysts in 2024 called for greater transparency and a more measurable impact on key financial metrics, such as the expense-to-revenue ratio.

Data shows AI spending dominates recent tech investments, but banks face challenges leveraging generative AI for clear commercial value. JPMorgan Chase’s AI initiatives, for example, aim to save time and improve customer service, but broader industry adoption remains slow, hindered by legacy systems and a focus on complex projects.

Juniper Research found that banks spent just under $6 billion globally in 2024 on generative AI, but forecasts this figure will grow to $85 billion by 2030.

This year, Bank of America alone directed $4 billion of its $12 billion annual tech budget to investments in new technologies in 2024, focusing on artificial intelligence tools for both clients and advisors. The bank’s virtual assistant, Erica, reached two billion interactions by April 2024, even as the bank ranks 15th in AI preparedness among global banks, trailing competitors like JPMorgan and Wells Fargo.

Over the past year, JPMorgan Chase, Capital One and Royal Bank of Canada have been the top pioneers in the banking industry’s AI arms race, according to the 2024 AI Index by Evident. These banks are quickly implementing AI tools for customer personalization, fraud prevention, and operational efficiency, with JPMorgan projecting up to $2 billion in returns from AI initiatives. Other banks like Morgan Stanley, HSBC, and TD Financial are catching up by ramping up their AI investments. 

Outcome: True