Moody’s Ratings has raised its outlook for the United States banking system, citing an improving environment for profitability and asset quality even as it warned that expected regulatory rollbacks could heighten risks across the sector.

The firm said Thursday that it now expects the mix of lower interest rates and muted but steady economic growth to support lenders over the next 12 to 18 months. 

Moody’s upgraded its outlook from negative to stable, pointing to healthier margins and consistent earnings momentum across major institutions.

The agency expects real gross domestic product growth to ease to 1.8 percent in 2026 from 2 percent this year. Even with the slowdown, it said banks should benefit from improved operating conditions and a more favourable interest rate backdrop.

Moody’s highlighted the prospect of a modest pickup in loan growth and a steeper yield curve, both of which it believes will bolster net interest income, the core revenue driver for most banks. 

It added that funding and liquidity positions are likely to remain stable as institutions adapt to easing monetary policy.

The firm stressed that an outlook change does not equate to a credit rating upgrade or downgrade. 

Instead, it reflects expectations about broad sector trends. Recent earnings from large lenders such as JPMorgan Chase, Wells Fargo and Bank of America have reinforced the stronger narrative, with executives generally reporting solid consumer and commercial credit performance and expressing confidence in the economic backdrop.

Despite the improved view, Moody’s cautioned that the policy direction in Washington could introduce new vulnerabilities. 

It warned that expectations of a lighter regulatory touch under the Trump administration may create additional risk for bank creditors, particularly if reforms weaken key supervisory safeguards.

The agency specifically noted that greater clarity around bank capital rules and stress testing is likely to lead to lower capital ratios at the largest banks. This shift, it said, may leave some institutions with thinner buffers to absorb losses during periods of stress.

Federal regulators are already moving to unwind or soften measures introduced after the global financial crisis, arguing that some requirements impose unnecessary costs on lenders. 

Supervisors are now exploring changes to the structure of stress tests and to the methodology used to determine minimum capital levels.

Moody’s said these adjustments could materially reduce capital requirements for certain banks, even as the industry faces an increasingly complex risk landscape marked by geopolitical uncertainty, evolving credit conditions and heightened cyber and operational threats.

The agency’s assessment signals a cautious but more optimistic stance toward the sector. While profitability and credit quality appear on firmer ground, the longer term implications of deregulation will shape how resilient US banks remain as the economic cycle matures.