Small Lenders Face Tariff-Related Turmoil While Big Banks Thrive

It’s not a great time to be a smaller bank in the U.S.

That’s according to a report Monday (July 14) by The Wall Street Journal, citing recent data showing that while the country’s banking giants are flourishing this year, regional lenders are having a tougher time.

During the second quarter, the KBW Nasdaq Bank Index, which monitors the country’s largest banks, was up 14%, thanks in part to some American megabanks. At the same time, the KBW Nasdaq Regional Banking Index, which covers smaller lenders, rose less than 3% during the same period of time.

The report argues that investors used to seeing banks as “economic bellwethers” might want to look past recent earnings for bigger banks and focus on regional lenders as they report their results this week.

The fortunes of these banks, the WSJ maintains, are more closely aligned with activity in the real economy, especially for medium-sized, domestically focused companies. Tariff-related volatility, the report added, is slowing hiring and investments among these businesses, and in turn hindering income growth among regional lenders.

This is evident in commercial and industrial loan activity, the report said. While there has been a pickup in such lending during the second quarter, it only amounts to roughly 3% year-over-year growth, the WSJ said, citing Federal Reserve data.

PYMNTS examined the pressures facing small and medium-sized businesses (SMBs) in a report last month, noting that many of them were struggling even before the latest tariffs.

Only a quarter of these operations remain open for 15 years, and close to half fail after five years, according to the most current data from the Small Business Administration. The reasons range from cash flow troubles and flawed business models to misgauging market demand and operational hiccups.

That report also noted another source of trouble for micro-businesses: nearly 30% of these companies in the U.S. and U.K. are rejected because the lender can’t confirm their basic data.

That’s according to research by PYMNTS Intelligence in collaboration with Markaaz, an Austin, Texas, company that allows lenders to verify the identities and financials of small businesses and assess their lending risk.

“Despite operating in a digital-first world where data is everywhere, micro-enterprises face a rejection rate that’s five times higher than for larger enterprises,” PYMNTS wrote.

“Why? Whether it’s a national bank, smaller financial institution or local credit union, lenders routinely complain that they struggle on their own to ascertain the validity of a micro-company’s basic corporate and financial details.”