How Does War Affect American Banking?

Here’s what to know about how war impacts American banking so you can better prepare yourself for a shifting financial landscape during such times.

1. Increased government spending and borrowing.

During wartime, the U.S. government often ramps up spending to finance military operations, equipment and support for troops. This surge frequently requires increased borrowing, usually by issuing government bonds. Banks and credit unions, as key players in the financial system, often buy these bonds, affecting liquidity and interest rates.

Impact on banking: Banks and credit unions may see a rise in government securities on their balance sheets. While government bonds are generally safe, heavy investment in them can tie up capital that might otherwise be loaned to consumers or businesses. Additionally, increased government borrowing can drive up interest rates.

2. Market volatility and uncertainty.

War introduces uncertainty to markets worldwide. Stock markets can become volatile as investors react to geopolitical risks, supply chain disruptions and fluctuating commodity prices. This volatility can create risk for banks that hold stocks or have exposure to loan defaults.

Impact on banking: Volatility may lead to tighter credit conditions as banks become more cautious in lending. However, credit unions tend to be more risk-averse and insulated from market volatility.

3. Disruption of global trade and supply chains.

Disruptions in international trade due to war can ripple through the banking system. Sanctions, embargoes or blockades can limit trade routes and affect multinational corporations—many of which rely on financial institutions for financing and cash management.

Impact on banking: Banks involved in international trade finance might see increased default risks or delays in payments. Credit unions, on the other hand, are generally more conservative lenders and may not be affected as significantly by disruptions to the global trade market.

4. Inflationary pressures.

War often leads to inflation, fueled by increased government spending and disruptions in supply. Inflation erodes the purchasing power of money and can lead to higher costs of goods and services.

Impact on banking: Inflation affects banks and credit unions by influencing interest rates and loan repayment values. Interest rates on new loans may rise during wartime, and inflation may strain consumers’ ability to repay loans, increasing the risk of defaults. The good news is that credit unions tend to be more resilient than banks in uncertain times as they usually maintain strong capital reserves and have diversified loan portfolios.

5. Heightened cybersecurity threats.

Modern conflicts often involve cyber warfare aimed at disrupting critical infrastructure, including financial institutions, which are attractive targets due to their central role in the economy.

Impact on banking: Banks and credit unions may need to ramp up investments in cybersecurity to defend against potential cyberattacks that could compromise customer data, disrupt transactions or damage reputations.

6. Regulatory and policy shifts.

War can prompt governments to implement new regulations affecting financial institutions. These may include stricter controls on foreign transactions, enhanced anti-money laundering rules or emergency financial measures in an effort to stabilize markets.

Impact on banking: Banks and credit unions must stay agile to comply with evolving regulations, which may increase operational costs.

How can consumers protect their money in case of war?

Here’s what you can do to protect your assets during times of war:

• Diversify your portfolio.
• Take advantage of Treasury Inflation-Protected Securities (TIPS).
• Follow the news, but don’t make any hasty decisions about your investments.
• Diversify your currency holdings.
• Make sure you’re using the most updated security settings on your devices.
• Avoid sharing sensitive info while on unverified sites.
• Use a VPN to encrypt your data and avoid accessing sensitive information when using public Wi-Fi.

It’s important to learn all about the ways a war can impact the economy and how you can protect your assets during wartime. This brief overview of wartime impacts on the economy, along with some actions you can take, is a great start.