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Describing our economy as “K-shaped” is all the rage. Unlike many shorthand descriptions of economic realities, however, this characterization is, as a general matter, fundamentally accurate. Yet much of the existing commentary still understates how profound and deeply embedded this structural divergence has become — and how critically consequential it is for the banking industry.
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For years, I have focused on this very issue through the Ludwig Institute for Shared Economic Prosperity, where we have been analyzing long-term trends in
What should concern bankers most is not merely the existence of the “K” but the fact that the spread between those on the upward and downward slopes has widened, leaving roughly 60% of Americans on the downward side of the divide. Put another way, the economically stressed portion of the population is not marginal; it represents the majority.
Over the past quarter century, the essential goods and services they predominantly consume — housing, health care, child care, transportation and food — have increased in cost more rapidly than the Consumer Price Index and faster than wage growth. For many of these households, maintaining even a minimal quality of life requires borrowing, balance-sheet strain or government assistance. That reliance on credit is increasingly visible on bank balance sheets. Total U.S.
At the same time, consumer spending has become increasingly top-heavy. Today,
This economic bifurcation presents both opportunity and risk for banks. On the positive side, a large share of American households now rely on credit to smooth consumption, manage volatility and bridge income gaps. And much of that demand flows directly through the banking system.
However, the downside risks are mounting. The same dynamics that fuel loan demand also increase the share of borrowers with thinner margins for error. Indeed, that pressure is beginning to show up in credit performance, as aggregate household debt delinquencies have edged higher, with
To the extent the K-shaped economy becomes more vertical — concentrating gains further at the top while deepening strain below — it becomes more stressful for banks and increases systemic risk.
Over time, these same dynamics are likely to reshape the banking industry itself. Just as income and spending are becoming more concentrated, assets and earnings may increasingly accrue to the largest institutions, while smaller banks face mounting pressure from credit stress, funding costs and scale disadvantages. Absent meaningful change, this pattern risks accelerating consolidation, leaving fewer institutions holding a larger share of the system’s assets.
Banks and other financial services providers can do a number of things to improve the economic picture for those positioned on the lower sloping part of the K while also strengthening their own long-term performance. Expanded financial education, proactive money-management tools and early intervention strategies can certainly help. These efforts matter, not only for borrowers but for banks, but they alone are not sufficient to reshape the broader economic trajectory.
Changing the shape of the K requires participation from other players and policy action beyond the banking sector. The government must leverage business tools, as well as tax and regulatory policy, to stimulate U.S. business and reduce taxes on lower-income Americans, thereby expanding the availability of living-wage jobs. For example, eliminating or reforming the payroll tax — widely regarded as one of the most regressive taxes on work — could improve take-home pay for many lower-income workers. Establishing a national commission whose sole mandate is to streamline business regulation and speed approvals could ensure housing, infrastructure, financial, and other projects are moving along at a much faster clip.
To their credit, many of today’s regulators are working to do this, but much more needs to be done. Ultimately, a resilient system cannot rest on an economy that leaves a majority of households under sustained financial strain. Over time, that imbalance creates systemic pressure that challenges even well-capitalized institutions. For banks, long-term performance is inseparable from a more balanced economic trajectory. Supporting policy reforms and product innovations that broaden opportunity is therefore not ancillary to business but central to maintaining sound credit performance, stable growth and the long-term health of the industry.