What’s at stake: Mortgages requiring federal flood insurance coverage might be harder to shut through the shutdown, amongst different impacts. Expert quote: For “monetary companies broadly, banks specifically, there are going to be disruptions.” — Brian Gardner, Stifel Financial Corp.Forward look: Extended shutdowns threaten federal employee pay and U.S. creditworthiness, doubtlessly triggering broader market disruptions that might have an effect on banks’ Treasury holdings and lending exercise.
WASHINGTON — The menace of government shutdown has turn into considerably commonplace in Washington, a part of the push and pull of a tightly divided Congress.
But when the government shut down at midnight Wednesday morning, it marked the primary closure since early 2019, which was the longest in historical past at 35 days. Republicans and Democratic lawmakers are deadlocked as Democrats refuse to vote on a invoice that would not prolong well being care subsidies set to expire on the finish of the 12 months, subsidies which are mandatory to stave off dramatic will increase in well being care costs for tens of millions of Americans. Republicans will not negotiate or vote on Democrats’ various laws.
Banking is extra insulated than many different industries from the speedy impacts of a government shutdown. Most banking businesses, together with the Federal Reserve, the Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau, are self funded or funded outdoors of the standard Congressional appropriations course of, and thus will proceed working principally as regular.
That being mentioned, an prolonged shutdown that might slash pay cuts for federal employees and threaten the credit score of the United States would have long-lasting implications for every kind of economic establishments, banks included.
“Financial companies, broadly, banks specifically, there are going to be disruptions,” mentioned Brian Gardner, Chief Washington Policy Strategist at Stifel Financial Corp. “And the longer the shutdown, the extra disruptive they’re.”
And there are a couple of key applications that grind to a halt instantly. Here’s the methods the government shutdown will most vastly have an effect on the banking sector.
Financial regulatory businesses face extra uncertainty
This shutdown is going on in opposition to the backdrop of a broader effort by the Trump administration to restructure the regulatory state, most notably for banks within the type of a radical discount within the CFPB workforce. While the company is self-funded, Trump has mentioned that his administration may use the shutdown to lay off hundreds of government staff, an effort that has been underway on the bureau since February.
Adam Martinez, the CFPB’s affiliate director and chief working officer, despatched an e-mail to employees late Tuesday about planning for a lapse in federal funding, in accordance to a duplicate of the e-mail obtained by American Banker. The CFPB is funded by annual funding requests to the Federal Reserve, which is funded by its financial coverage actions.
“CFPB will proceed operations within the occasion of a shutdown, regardless that another elements of the federal government can be affected. Therefore, CFPB staff ought to plan to report to work as common on Wednesday October 1, 2025. Bureau management will monitor the state of affairs and warn you if any companies could also be disrupted or if you’ll need to alter processes,” Martinez mentioned within the e-mail.
“The Bureau anticipates no disruption in pay, advantages, journey, or different companies ought to different businesses shut,” the e-mail mentioned.
Currently, nearly all of CFPB staff are being paid not to work. Acting CFPB Director Russell Vought, who can also be the Trump administration’s director of the Office of Management and Budget, directed employees to “stand down” in February and moved to hearth many of the bureau’s staff. The CFPB employees’ union sued, gaining an injunction in opposition to the administration issuing a reduction-in-force with out following correct process. An appeals courtroom stayed the injunction final month, and the union is now interesting the keep to the complete DC Circuit.
The FDIC and the Fed are additionally self-funded — the FDIC by way of charges to banks, the Fed by way of its financial coverage operations — and can proceed to function largely as regular throughout a shutdown. The Office of the Comptroller of the Currency, which is housed within the Treasury Department, might see some minor disruptions, though a big share of Treasury’s employees are thought-about “important” and thus not topic to furlough throughout government shutdowns.
The Securities and Exchange Commission has previously principally shut down throughout a government funding lapse.
“What is deemed to be non-essential actions are going to stop, mentioned Gardner. “Nonessential is within the eye of the beholder, and there is a lot that the administration can resolve is crucial and what’s nonessential.”
Based on historic patterns, which means the SEC will go darkish, he mentioned.
“So in case you’re trying to increase capital, your registration assertion might be not going to get processed,” he mentioned.
Flood insurance coverage program grinds to a halt
One of probably the most speedy and concrete impacts on banks’ day by day operations comes from the closure of the National Flood Insurance Program. Without congressional authorization, the Federal Emergency Management Agency can’t challenge new flood insurance coverage insurance policies, successfully blocking a big variety of mortgage originations.
“What is evident is that the flood insurance coverage program will shut to new insurance policies till there’s a spending deal,” mentioned Jaret Seiberg, an analyst with TD Cowen, in a observe Wednesday. “That means no mortgages which require federal flood insurance coverage might be originated.”
The impression hits banks in coastal and flood-prone areas significantly arduous. Any property in a delegated flood zone that requires a federally-backed mortgage should carry flood insurance coverage. When the federal program shuts down, these transactions merely can’t shut. While non-public flood insurance coverage exists, it stays a comparatively small market and does not totally substitute for the federal program’s attain and affordability.
Banks have developed workarounds by way of repeated publicity to shutdown threats.
“The short-term impression is restricted as lenders have been by way of shutdown threats repeatedly,” Seiberg mentioned. “The business will transfer up closings to get forward of the Sept. 30 deadline. This softens the impression, although prolonged shutdowns will block mortgages from being made.”
The Fed, the FDIC and the OCC issued reminders to lenders that they could proceed to make loans which are topic to the federal flood insurance coverage statutes when the National Flood Insurance Program shouldn’t be obtainable.
“Lenders could proceed to make loans with out flood insurance coverage protection throughout this time however should proceed to make flood determinations; present well timed, full, and correct notices to debtors; and adjust to different relevant elements of the flood insurance coverage rules,” the businesses mentioned. “In addition, lenders ought to consider security and soundness and authorized dangers and will prudently handle these dangers through the lapse interval.”
Both House Financial Services Committee Chairman French Hill, R-Ark., and the committee’s rating member Maxine Waters, D-Calif., pointed to the flood insurance coverage lapse simply after the shutdown. Hill mentioned that the lapse hurts “at-risk property house owners throughout our nation,” whereas Waters mentioned that this system “would largely be unable to pay out flood insurance coverage claims, and its flood mapping course of would finally come to a halt — all through the top of hurricane season.”
Small enterprise lending and neighborhood growth stall
Beyond mortgages, the shutdown might instantly freeze Small Business Administration mortgage applications that many banks depend on to serve small enterprise clients.
“SBA loans most likely is not going to be processed … through the shutdown,” Gardner mentioned. “This creates a very troublesome state of affairs for banks focusing on SBA lending, the place government ensures permit them to prolong credit score to companies that may not qualify for typical loans.”
Community Development Financial Institution applications additionally face disruptions, principally in processing updates to CDFI standing and functions, a course of already slowed by the Trump administration’s hostility towards the CDFI business. Updates to the CDFI web site might be unavailable through the shutdown, the fund mentioned in an replace, and the assistance desk might be unable to reply to questions associated to CDFI Fund applications, compliance or certifications.
The CDFI Fund can also be not in a position to course of new functions for lending awards to exchange earlier functions that made references to ethnicity, race or local weather — initiatives that the administration has pledged to finish assist for. Treasury mentioned the CDFI Fund will resume processing functions after the government shutdown is completed, but it surely’s unclear what is going to occur to functions acquired between when the government reopens and the deadline closes.
Economic knowledge blackout complicates planning
Perhaps much less seen however equally consequential is the shutdown’s impression on financial knowledge assortment and publication. The Bureau of Labor Statistics, Census Bureau, and different businesses that produce the employment experiences, inflation knowledge, and financial indicators that banks depend upon for strategic planning largely stop operations.
“The complete state of affairs across the BLS, there’s a variety of consideration on they are not going to come out with knowledge,” mentioned Ian Katz. “That’s the identical as it might have been in one other time. But now, as a result of that complete challenge has turn into so political and fraught, BLS not placing out knowledge goes to be a giant deal in Washington.”
Banks depend on government financial knowledge for every little thing from setting lending requirements to stress-testing their capital positions to forecasting mortgage demand. Risk administration groups use employment experiences to gauge client credit score high quality. Commercial lending officers examine GDP and manufacturing knowledge to assess enterprise debtors’ prospects. Treasury departments analyze inflation tendencies to handle rate of interest threat.
When this knowledge move stops, banks should depend on private-sector forecasts and proprietary fashions, introducing further uncertainty into already complicated projections. The downside compounds if the shutdown extends lengthy sufficient that a number of scheduled knowledge releases get skipped completely, creating gaps within the financial time collection that banks use for historic evaluation and modeling.
The knowledge blackout additionally impacts banks’ capability to adjust to regulatory stress testing necessities, which demand refined evaluation of how their portfolios would carry out underneath adversarial financial situations. While regulators could grant extensions or flexibility throughout shutdowns, the underlying problem stays: banks try to make billion-dollar selections with a few of their most essential data sources unavailable.
Market impression unsure
Historical precedent suggests monetary markets could shrug off the shutdown, no less than initially.
“I went again and checked out prolonged government shutdowns — not the one or two day selection, not those that occurred over weekends and holidays, however situations the place there are shutdowns of 5 buying and selling days in a row or extra,” Gardner mentioned. “There have been some sell-offs years in the past. But the more moderen shutdowns, I do not suppose you may actually see a lot occurring with the markets.”
Markets have turn into desensitized to Washington’s fiscal dysfunction, viewing shutdowns as political theater somewhat than real financial crises. Traders anticipate Congress will finally attain a deal, and the direct impression on company earnings and financial development from a brief shutdown stays minimal.
However, an prolonged closure that threatens federal employee paychecks, delays government contracts, and raises questions about U.S. creditworthiness might shift market sentiment. Banks maintain substantial Treasury securities of their funding portfolios, and any trace of credit score threat related to U.S. government debt would reverberate all through the monetary system. The longer the shutdown persists, the larger the chance that it evolves from a manageable inconvenience right into a confidence-shaking occasion that impacts lending, funding, and financial exercise in ways in which finally hit banks’ steadiness sheets.
