Noor Zainab and Elizabeth Dilts Marshall, Matt Scuffham

NEW YORK (Reuters), Despite healthy investment banking pipelines, and continued loan growth, Wall Street’s top banks raised concerns about the future of the financial system.

The bank earnings were mixed last month. Some disappointments included a drop in trading revenue and lower asset purchases by the Federal Reserve. The Federal Reserve is now looking to increase rates aggressively and banks are currently struggling with high inflation.

A number of top executives provided updates on the market at The Credit Suisse (SIX) Financial Services Forum, Florida. This is about one month after the fourth-quarter earnings report.

“We are shifting from an environment with very easy money, below trend inflation, to one that has tighter money and higher trend inflation. According to David Solomon, Chief Executive Officer at Goldman Sachs (NYSE): The economic environment has changed and will have consequences.

The high inflation rate is enough to make Bank of America (NYSE) CEO Brian Moynihan worry. His bank stressed tested their portfolio in the event that Fed policymakers were unable to manage inflation, and the economy goes into recession.

Moynihan stated, “We must run those scenarios.” A recession will cause a lot of damage to the sector. They don’t intend to do that. They will, hopefully, do an admirable job of handling it. That’s what we stress-test and it works.

Mike Santomassimo, chief financial officer at Wells Fargo (NYSE:) & Co, the fourth-largest U.S. bank, noted that credit spreads had been widening and “that’s an area to watch to see if there are any cracks that start to emerge”.

“Inflation can be a serious headwind for economic growth. Solomon acknowledged that there are many unknowns. Solomon said that no one can predict how they will navigate the monetary policy landscape to rebalance inflation. It’s a mystery.

Inflation and fears of Fed more aggressive rate increases have caused markets to crash this year. The Dow Jones Industrial Average fell 7%, while the yield curve flattened and bond yields jumped.

Goldman, Bank of America, and Wells Fargo shares were all down over 2% on Thursday, which was below the wider market. The S&P 500 was down 1.3% mid-morning.

Solomon stated that everyone is used to asset appreciation, and there might be a time when asset appreciation is less.

Trading activity was not as high as in 2021 but was “still pretty active” while M&A activity so far was “pretty high,” he said. He said that there will be less equity issued this year.

Moynihan of Bank of America had a similar tone when he stated that the bank’s capital markets business is “down” for 2022, despite the fact that there continues to be strong customer activity at the investment bank.

Santomassimo of Wells noted that the consumer and realty portfolios continue to perform well, but the “auto space,” which is quite small in comparison to the balance sheet, at the bottom of the book you might see some noise.

He said however that increasing rates could help achieve the bank’s goal of a 15% return for tangible equity. Banks make more when interest rates rise because they take advantage of the difference in the interest that banks charge customers and what they can invest to earn interest.

“The question will be where rates go and then what impact that has on the economy and the environment we’re in,” Santomassimo said.