The end of 2022 can't come soon enough for many in the banking industry. Sputtering capital markets, job cuts, raging inflation, the crypto meltdown and rising interest rates marked a year of upheaval. Whether 2023 brings revival or more of the same hinges to a large extent on the Federal Reserve.

Odds are high for a recession next year as the central bank continues — albeit at a slower pace — to boost borrowing costs in an effort to bring price pressures under control. While that typically means credit quality will suffer, the country's biggest banks are in a strong position to weather a downturn, including one that further crimps the mortgage industry.

In fact, traditional banks might even get a respite on some fronts, as the expected economic headwinds force some of their upstart competitors in the fintech industry to retreat.

What won't let up is pressure to deliver on diversity promises, and for banks to prove they're making progress by providing more transparency on the makeup of their ranks.

What follows is a look ahead at what the industry might expect in 2023.

Big Banks Will Be Fine

Staff cuts and potential recession aside, big banks are well-positioned to weather what is expected to be a turbulent year.

"Their capital position is strong, their liquidity position is strong," said Todd Baker, a senior fellow at Columbia University's business school with a focus on banking on financial technology, among other topics. "They haven't, as far as I can see, overextended themselves in any type of loan or risk category."

The outlook isn't all rosy. After Wells Fargo & Co. reached a $3.7 billion settlement over allegations of "widespread mismanagement" earlier this month, the Consumer Financial Protection Bureau vowed to get tougher on banks that run afoul of regulations.

"Our nation's banking laws provide strong tools to ensure that insured depository institutions do not breach the public trust, and in the new year we expect to work with our fellow regulators on whether and how to use them," CFPB Director Rohit Chopra said.

While capital levels are strong, a recession would force lenders to set aside much more in reserves to cover bad loans, which would hurt the bottom line and potentially add to the layoff lists. At the same time, higher interest rates should continue to juice net interest income at the banks — the difference between what lenders make on loans and what they pay depositors.

Other banks are also still struggling. Smaller lenders can't grow except by acquisitions, Baker said, and midsize ones are much more sensitive to regional dynamics, and don't have as much capacity to invest in technology.

Mortgage Pain

The housing market was walloped by rising interest rates in 2022, and the number of new mortgages dropped precipitously. That's expected to continue into next year, with TransUnion predicting the number of purchase originations at just above 4 million for the year — about half what they were in 2021.

"I think 2023 looks a lot like the second half of 2022," Rocket Cos. Chief Executive Officer Jay Farner said in an interview. "You're going to have to bring value to the client in more of a fintech way."

As lenders grapple with the down market for mortgages, they should focus on engaging with consumers in other ways, offering a range of banking services well before clients are even starting to look for a home, said Farner, whose firm is one of the country's largest mortgage lenders.

End of 'Fintech Tourism'

Financial-technology firms rapidly expanded over the past few years, fueled by venture capital investments and lower borrowing costs. That's changing, and fast, as some of the "fintech tourists," as LendingClub's Anuj Nayar calls them, exit the space.

"Now we are seeing some of the tourists pull back or bow out completely," Nayar, who's a senior vice president and financial health officer at LendingClub, said in an email. "But just like with e-commerce in 2000/2001, those focused on this market will continue to succeed and grow."

Even Nayar's firm hasn't been immune. The fintech's shares have tumbled about 65% this year.

As venture capital funding dries up, prepare for acquisitions or shuttered shops, Nayar said.

"In the current market, we will also see fintechs pull back on expenses and manage their burn rate very carefully," he said. "We will see a returned focus on profitability rather than growth."

One possible avenue for expansion: alternative investments.

"Where else can I invest if I'm not investing in the stock market?" said Arjun Kapur, founder and managing director of Forecast Labs, a venture group within Comcast. Interest in alternative investments — think gold, art, diamonds — and the fintechs that offer them is an area showing signs of life and "gaining pretty good traction," according to Kapur.

Crypto Regulation

With the meltdown of FTX and high-profile investigations into Sam Bankman-Fried's operations, cryptocurrency is an area ripe for regulation. Financial regulators have already trained their sights on the collapse and its fallout, and senators, including Massachusetts Democrat Elizabeth Warren and Kansas Republican Roger Marshall, recently introduced legislation to rein in the industry.

On Thursday, U.S. Securities and Exchange Commission Chair Gary Gensler said the agency's patience is wearing thin for digital-asset exchanges and other firms that shirk its regulations.

"The runway is getting shorter" to start following rules and register with the agency, Gensler said in an interview. "The casinos in this Wild West are non-compliant intermediaries."

Over the past year and a half, the SEC chief has argued that most tokens are really just unregistered securities trading on the blockchain. He says they must follow the agency's tough trading and investment rules.

Culture

In the wake of George Floyd's murder in 2020, finance executives pledged to work to improve racial equity, not just across the U.S. but inside Wall Street offices that have long had just one Black person in the room — if any.

In the year ahead, the big banks are likely to share data on their employee demographics that will reveal how they've been doing in the post-Floyd era. So far, there have been signs that progress is choppy.

"Transparency is critical," said Ana Duarte McCarthy, who headed diversity efforts at Citigroup Inc. and now consults on inclusion with companies and nonprofits. "What we will be able to do is see if the commitments, the strategies, the intentional focus — on attracting, promoting, and advancing Black talent — is having an impact."

There's no way to know what's working and what isn't, she said, without the hard numbers. "What's the old maxim? What gets measured gets done."

Investment-Banking Revival?

Some dealmakers are predicting 2023 will feature a rebound from this year's slump, as they await a peak in the Fed's benchmark rate.

Bank of America's co-head of financial sponsors, Saba Nazar, said that once that top is reached, equity and debt risk can be priced appropriately, and credit-market liquidity will return, "allowing investment banks to de-risk, and syndicate the hung loans clogging up their balance sheets."

That will "create capacity to underwrite new transactions," Nazar said.

While nobody can be certain what the Fed does next year or where inflation and unemployment levels land, Jim Langston, who co-leads U.S. mergers and acquisitions at Cleary Gottlieb Steen & Hamilton, said the outlook is getting somewhat clearer.

"I think there is a better picture of that," Langston said. "We think next year will be more active than this year. The pipeline's full."

Paige Smith reports for Bloomberg News.

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