Banks Focus on Capital Strategies in 2025 Amid Evolving Economic Landscape

Banks across the United States are entering 2025 with a sharp focus on planning and meeting their capital needs. With the economic environment continuing to evolve, many banks are analyzing opportunities for growth and determining the most effective strategies to strengthen their financial positions. Recent data from regulatory agencies, financial institutions, and market analysts, including the Federal Reserve, S&P, the FDIC, and Bankers’ Bank, highlight key trends in capital raises, senior debt issuances, and subordinated debt strategies.

Senior Debt Dominates Capital Strategies

Senior debt remains the primary financing instrument for banks, reflecting its popularity in 2024. Moreover, U.S. banks total senior debt issuance in 2024 increased to about $70 billion, up from about $63 billion in 2023. Senior debt offers banks flexibility, with options for term loans and variable lines of credit. It continues to be a cornerstone for managing balance sheets effectively. Institutions like Bankers’ Bank have played a pivotal role in customizing competitive and efficient senior debt solutions tailored to the specific needs of banks and their holding companies.

Subordinated Debt: A Key Consideration

Subordinated debt is classified as tier 2 capital at the holding company level and is often down-streamed to the bank subsidiary for tier 1 requirements. It presents a strategic opportunity for banks aiming to enhance their capital structure. Key benefits include long-term and non-dilutive capital treatment, interest-only payments, and the absence of collateral requirements. Subordinated debt issuances typically require an original maturity of at least five years. Many banks that issued debt in 2020 are now exploring refinancing opportunities to replace floating-rate debt with fixed-rate options. The typical issuance timeline for subordinated debt is 60-90 days, underscoring the importance of proactive planning. Subordinated debt issuances saw a decline in late 2024. However, they remain a valuable tool for banks seeking to optimize their capital mix.

Preferred Equity Offerings See Resurgence

Preferred equity offerings also gained traction in 2024, with banks raising $1.62 billion in the fourth quarter alone after muted activity in the third quarter. This rebound signals a renewed interest in diversifying capital sources to support growth and resilience in an uncertain economic landscape. January 2025 has already seen two multi-billion dollar preferred equity offerings come to market.

Looking Ahead

As banks chart their course for 2025, the focus remains on achieving growth while maintaining financial resilience. Senior debt, subordinated debt, and preferred equity offerings provide a robust framework for addressing diverse capital needs. Institutions are encouraged to engage with trusted partners and explore tailored solutions to optimize their capital structures and seize opportunities in the year ahead.