How a prolonged government shutdown could hit banks

The federal budget logjam reached day 14 and faced another procedural vote as a narrowly divided Senate remained at odds over health care spending in particular.

The government shutdown has delayed select federal payments, small business loan processing, and economic data releases, while shuttering other activity vital over the long run to the U.S. economy and to the banking sector.

“Community and regional banks feel this more acutely than large national banks because community and regional institutions tend to lack geographic diversification, have more concentrated client bases, and they rely on relationship-driven deposits,” says Anna Kooi, leader of  Wipfli’s financial services practice.

With this uncertain backdrop persisting, we spoke with Kooi about how government shutdowns work their way into banking operations and what financial institutions can do in response. For certain, the current shutdown situation is fluid, with side negotiations ongoing and—when a vote succeeds—key government functions expected to reopen after some catch-up.

Many banks and credit unions operate largely as usual and can assure customers and members that access to funds via branches, ATMs, and mobile payment features are working, although some government-related services, such as student loan-linked processing or other tasks, may see some delays. Still, preparation and awareness are vital.

Kooi’s insights, summarized below, help banking leaders prep for more days of impasse now or put procedures in place for similar scenarios in the future.

Depending on the institution, delays in federal payments and any shutdown-related slowdown in economic activity can pressure lending or deposit portfolios at community and regional banks. For example, some locations may come to lean on seasonal inflows from agricultural payments, or their bank traffic is closely linked to a nearby military base or veterans hospital.

• Liquidity and funding pressure. If delayed inflows from impacted customers increase bank liquidity risk, conditions might force institutions to draw on wholesale funding or borrow from the Federal Home Loan Bank (FHLB). And the longer the shutdown, the longer household strain may be felt, which may trigger deposit flight to cover expenses. If a longer shutdown triggers a more pronounced market impact, clients may move to a higher-yield option, creating deposit outflows. Notably, the impact could hit larger commercial accounts tied to the government sector, leading to a drawdown in deposits for this segment as well.
• Credit quality and loan performance. As for the lending side, a prolonged shutdown can strain local economies, requiring banks to factor in higher delinquencies and additional loan-loss provisions.
• Lending activity and credit availability. And banks could be forced to cool lending decisioning. Release delays in economic data tied to a prolonged shutdown and less confidence in the picture the data offers if response collection is impacted by the shutdown can lead to tighter underwriting, reduced demand, and narrower net interest margins (spread compression).

Broader market moves and confidence can’t be ignored either, Kooi said, including how a prolonged shutdown affects the inputs the Federal Reserve weighs when considering policy, and the overall health of the U.S. economy and the interest-rate environment, already a subject for debate in the final months of 2025 and heading into 2026.

Regulators might deprioritize community and some regional banks—or, conversely, refocus more intently when oversight resumes. Banking leaders can prepare.

Examiners often backload oversight, meaning expectations and scrutiny increase once regular supervision resumes, Kooi said. Delays might lead to broader exam scopes when they return. Regulators will likely rely more on off-site analytics, liquidity monitoring, and exception-trend analysis in the interim.

Institutions that emerge strongest will treat any lull in supervision as a time to get ahead, not relax. 

Some suggested practices during these uncertain times are:

• Document oversight by both the board and the audit committee, especially around liquidity, concentrations, and stress testing.
• Anticipating shifts in focus areas.
• Updating risk assessments, particularly BSA/AML, IT/cybersecurity, credit, model, and vendor risk so that they match the current environment.
• Conducting independent reviews, such as internal audit and external validations on the high-risk areas that regulators are likely to revisit.
• Aligning capital adequacy assessments with interest-rate and credit-quality assumptions.
• And, once reviews resume, maintaining an open dialogue with your primary regulator, leveraging existing rapport to ask outstanding questions, sharing the best practices your organization maintained during the shutdown, and resetting the relationship.

A government shutdown also impacts banking vendors and fintech partners. Financial institution (FI) leaders can’t afford to delay this business so they must take actions that make up for this disruption.

A federal government shutdown can ripple outward to affect community and regional bank vendors and fintech partners. Rather than pause business entirely, FIs can mitigate the impact.

Many fintech and regtech vendors depend upon federal data sources that may go dark during shutdowns, such as the Internal Revenue Service or Small Business Administration. Kooi suggested that banks confirm their vendors can substitute government data with private sources and add manual processes in place of government sources, when appropriate. Don’t assume a vendor will be able to deliver as usual during the shutdown; a bank may need to strengthen vendor oversight and bump up the frequency of vendor health checks during this time, she says.

When business must be delayed, banking leaders can pre-stage work to move forward rapidly once portals reopen. For instance, communicate clearly about borrower timing and status.

Banks can be drawing up additional, even out of the ordinary, precautionary steps because it’s never clear how long a government shutdown may last.

Here are a few actions FIs can consider, Kooi said:

• Daily liquidity monitoring.
• Additional stress testing and scenarios, including runoff scenarios.
• Reassessing contingency funding and prepositioning collateral at the Federal Home Loan Bank and the Federal Reserve discount window.
• Enhancing depositor communications.
• Targeted loan portfolio reviews for exposure to government contractors, FHA/VA housing developers, and agriculture/USDA-related borrowers.
• Tightening or tiering underwriting standards and increasing loan review frequency for those exposed areas.
• Revalidating vendors’ financial health and activating backup vendors where necessary.
• Tightening cybersecurity posture, especially with vendors.
• Running a rapid tabletop exercise to simulate prolonged federal disruption to understand weak points.
• Community banks can use a shutdown not just to survive, but to “pressure test” their resilience and earn long-term trust.

There are broader economic health implications for consideration: local lending, small business support, and community resilience, for instance, that often depend on the banks that serve an area.

Community banks play a disproportionate role in sustaining local economies, particularly in rural and mid-market regions. They account for about 60% of small business lending and about 80% of agricultural loans in the U.S., according to trade group The Independent Community Bankers of America. They provide relationship-based credit often unavailable through fintech or national lenders.

When liquidity tightens or credit standards rise—even modestly—it has immediate effects on hiring, investment, and consumer spending in those communities. Broader impacts include stress on local government agencies and nonprofits, ripple effects on real estate and housing markets, business consolidation pressures, and widening of equity gaps.

By contrast, a well-prepared and engaged community bank, as well as their slightly larger regional bank brethren, can anchor resilience.

That’s when a financial institution acts not only as the place to process a paycheck or even as a lender, rather as a stabilizer and trust-builder during uncertainty.

Anna Kooi leads the Financial Services Practice at Wipfli. Rachel Koning Beals is a Senior Editor at ProSight.