New York CNN Business  — 

Banks in America’s heartland have found themselves in the crossfire of President Donald Trump’s trade war with China.

The tit-for-tat tariffs with China “certainly” have negative consequences for banks in farm states, FDIC Chairman Jelena McWilliams told CNN Business in an interview on Wednesday. McWilliams, who was nominated to her post by Trump, said the precise impact is difficult to measure.

China has retaliated against Trump’s tariffs by imposing ones of its own on soybeans, wheat, corn and other agriculture products. Those levies from Beijing have made American crops more expensive for Chinese buyers – some have stopped buying US-grown soybeans altogether.

Trump unnerved investors on Thursday by threatening to impose 10% tariffs on another $300 billion in US imports from China. The escalation suggests the trade war, and impact on American farmers, is not going away any time soon.

With farmers under fire, delinquencies on agriculture loans held by commercial banks have tripled since mid-2015 to an eight-year high, according to the St. Louis Federal Reserve Bank.

“We may experience more delinquencies, which then become very difficult for those communities and our ag sector,” McWilliams said.

The FDIC chief, who spoke to CNN Business at the KBW Community Bank Investors Conference, said her agency is “monitoring very closely” how rural banks are being affected by the trade war.

“At this point in time, we don’t have any immediate concerns about how our ag banks are doing,” McWilliams said. “But down the road, we will have to see what the implications are.”

China’s soybean purchases plummet

The United States and China wrapped up two days of trade negotiations in Shanghai this week without announcing significant progress. Talks had been expected to resume in September, but that was before Trump vowed new tariffs.

As the trade war lingers, farmers continue to suffer. China’s purchases of US soybeans have plunged to the lowest level since 2004, according to a Bloomberg analysis.

Seeking to blunt the economic pain, the Trump administration announced plans to pay $14.5 billion in aid to farmers by the end of August. That relief is on top of the $10 billion in aid that farmers received last year.

McWilliams, who previously worked as a top lawyer at regional lender Fifth Third Bancorp (FITB), suggested that banks could be somewhat shielded from the trade war by the fact that farmland prices remain high.

“So long as the farmers have some equity in their land,” she said, “there’s a way to secure those loans even when delinquencies happen.”

FDIC chief: Banks are doing ‘exceptionally well’

The trade war is a dark patch in an otherwise bright landscape for America’s banks, which continue to recover from the last decade’s Great Recession.

US banks hauled in $61 billion in profits during the first quarter, up 9% from the year before, according to the FDIC. The number of banks on the agency’s problem bank list dipped to the lowest level in a dozen years. No banks failed during the first three months of the year.

“This is the best of times,” McWilliams said. “We are looking at a very healthy banking sector.”

Trump promised to rejuvenate America’s community banks. His tax cuts have certainly padded bank profits and the industry’s outlook has been further boosted by efforts to cut regulation.

Last month, the FDIC joined other regulators in adopting a rule that will exclude small banks from the Volcker rule, which bans lenders from making bets with customer deposits or their own funds. That rule, a controversial part of the 2010 Dodd-Frank reform law, also prohibits banks from owning hedge funds or private equity funds.

The booming bank profits suggest the American economy is performing well, despite the trade tensions and soft inflation that led the Federal Reserve to cut interest rates this week for the first time in more than a decade.

“Banks are doing exceptionally well. And I’m telling the folks at the FDIC: Don’t get used to this,” McWilliams said.

Preparing for the next recession

One potential problem area, however, is leveraged lending. Encouraged by extremely low interest rates, there has been a boom in loans to weaker companies, many of which are losing money.

McWilliams is concerned about the leveraged lending boom and said regulators are monitoring risk.

Sheila Bair, who led the FDIC during the 2008 crisis, recently told MarketWatch that a leveraged lending bust could hit the economy faster than the subprime meltdown did.

McWilliams pointed out that most leveraged loans are held outside of the banking system. However, she acknowledged that banks do face indirect exposure because they lend to the nonbank firms at the heart of the boom. Regulators are working to understand how bank portfolios are structured to withstand shocks.

“If the economy turns, we will have a few problems on our hands – and leveraged lending would be one of them,” said McWilliams, who worked at the Federal Reserve during the Great Recession.

McWilliams said she regularly challenges FDIC examiners and economists to think outside the box during this time of prosperity. She recalled that everyone, including regulators, was lulled into a false sense of security prior to the last recession.

The recovery from the Great Recession has now spanned more than a decade, making it the longest in American history.

“This is not going to last forever. We need to make sure we are prepared for that downturn – whenever it comes,” McWilliams said. “We cannot have a repeat of the last crisis and we cannot have any more bailouts.”