Kai Xiao’s Post

The good news? The commercial real estate market is not projected to crater and that large U.S. banks have enough capital to survive another massive crisis. The bad news? The CRE lenders remain vulnerable, while there are worrying signs for corporate credit, default rates, loan performance and the economy. Read "The Fed’s 2024 Stress Test: Key Takeaways" in #RiskIntelligence. https://lnkd.in/eG2a82jx #financialrisk #riskmanagement #riskmodeling #CRE

The Importance of Real-Time Stress Tests and Scenario Analysis for Asset Managers In today’s volatile market environment, real-time stress tests and scenario analysis have become indispensable tools for asset managers. While the Federal Reserve’s annual stress tests (see below GARP article) provide valuable insights into the resilience of the largest U.S. banks, asset managers must conduct their own tailored stress tests based on risk factors specific to their portfolios. This approach ensures that the needs and expectations of end investors are accurately targeted. For buy-side firms, performing these stress tests and scenario analyses enhances transparency and builds credibility. It allows them to demonstrate their ability to withstand adverse market conditions and manage risk effectively. Particularly for investors in Separately Managed Accounts (SMAs) and/or institutional portfolios, this practice provides assurance that their investments are being actively monitored and safeguarded against potential market disruptions. The need for real-time stress tests and scenario analysis has never been more critical. In the current environment, characterized by economic uncertainties, fluctuating interest rates, and evolving market dynamics, asset managers must be proactive in identifying and mitigating risks. These analyses enable asset managers to simulate various adverse scenarios and assess their potential impact on portfolio performance. This proactive risk management strategy not only protects the investments but also fosters greater confidence among investors. And by leveraging advanced risk analytics tools, asset managers can navigate the complexities of the current market environment and ensure the resilience and stability of their portfolios. Finally, a key point from the article below that is important - "Risk managers are advised to enhance stress testing infrastructure for better strategic planning and portfolio optimization." #marketrisk #stresstesting #businessintelligence #realtimeriskanalysis

The Fed’s 2024 Stress Test: Key Takeaways The good news is that the commercial real estate market is not projected to crater and that large U.S. banks have enough capital to survive another massive crisis. The bad news is that CRE lenders remain vulnerable, while there are worrying signs for corporate credit, default rates, loan performance and the economy.

This doesn't pass my own smell test, I am skeptical and doubtful that this is a valid assessment of the banks today...~r "The 31 large US banks that participated in a Federal Reserve stress test would all be able to withstand a severe global recession, a new demonstration of strength as they push back on stricter regulations that would require them to hold more capital. Results released by the Fed Wednesday show that these banks would have enough capital on hand to absorb losses and continue lending during a two-year scenario where US unemployment climbs to 10%, commercial real estate prices fall 40%, and the stock market plunges 55%." https://lnkd.in/gKEkMp6M?

Big U.S. banks pass Fed’s stress test All 31 of America’s biggest banks have passed the Federal Reserve’s annual stress tests. The stress test, which formally began in 2011 after the 2007/09 financial crisis, assesses whether banks could endure a severe recession in which unemployment rose to 10%. The scenario imagined by the Fed would see banks lose nearly $685bn. The total projected losses included $175bn in credit card losses, $142bn in losses from commercial and industrial loans, and nearly $80bn in losses from commercial real estate. Michael Barr, vice-chairman of supervision at the Fed, said the test “shows that large banks have sufficient capital to withstand a highly stressful scenario and meet their minimum capital ratios.” He noted that the goal of the test is to “help to ensure that banks have enough capital to absorb losses in a highly stressful scenario.” He added: “This test shows that they do.” Subscribe to Risk Channel now if you want to receive the most relevant #RiskNews directly to your inbox.👇 https://lnkd.in/gQeh9xuf #risk #riskmanagement #finance #banking #stresstest

This shows the adequacy of current capital levels as the 31 largest banks passed the stress tests. The scenario was to test the ability to keep operating for two years with 55% crash in the stock market, 40% drop in commercial real estate value, and 10% unemployment. The regulators who want to require more capital are wrong. Banks as a whole are better capitalized than ever. The requirement for higher capital would impair banks, hurt small businesses, consumers, and damage the economy.

𝗦&𝗣 𝗚𝗹𝗼𝗯𝗮𝗹 𝗱𝗼𝘄𝗻𝗴𝗿𝗮𝗱𝗲𝘀 𝗼𝘂𝘁𝗹𝗼𝗼𝗸𝘀 𝗼𝗻 𝗳𝗶𝘃𝗲 𝗿𝗲𝗴𝗶𝗼𝗻𝗮𝗹 𝗨𝗦 𝗯𝗮𝗻𝗸𝘀 𝗱𝘂𝗲 𝘁𝗼 𝘁𝗵𝗲𝗶𝗿 𝗰𝗼𝗺𝗺𝗲𝗿𝗰𝗶𝗮𝗹 𝗿𝗲𝗮𝗹 𝗲𝘀𝘁𝗮𝘁𝗲 𝗲𝘅𝗽𝗼𝘀𝘂𝗿𝗲𝘀 S&P Global downgrades outlooks on five regional US banks to 'negative' due to their commercial real estate (CRE) exposures, in a move likely to reignite investor concerns about the health of the sector. The ratings agency downgraded First Commonwealth Financial, M&T Bank, Synovus Financial, Trustmark and Valley National Bancorp to "negative" from "stable," it said. "The negative outlook revisions reflect the possibility that stress in CRE markets may hurt the asset quality and performance of the five banks, which have some of the highest exposures to CRE loans among banks we rate," S&P said. Source: Reuters https://lnkd.in/esYbV8A3

The Federal Reserve’s annual stress test showed all 31 of the largest U.S. banks are likely to withstand a severe economic downturn, stay above minimum capital requirements and maintain the ability to lend to consumers and corporations. Banks have built extra capital in recent years, which has been driven by the approaching Basel III endgame requirements and growth in Significant Risk Transfers – which we helped to pioneer – among other strategies.   In the hypothetical scenario, more losses compared to the previous year were observed across the board given factors like higher holdings of consumer credit card loans, a greater share of corporate bonds being downgraded and squeezed lending margins, but the ability to withstand a severe recession is a positive sign for the economy.   With the potential for continued volatility within the industry and evolving risks, our team actively monitors markets to understand how we can continue to provide our global, solutions-driven approach for partners and clients. https://lnkd.in/gKtJatzi

This note from Bloomberg is a further reminder of how loose financial conditions had become over the last few months . . . *Banks Are Piling Back Into Everything From Mortgage Debt to CLOs* From Bloomberg: (Bloomberg) -- US banks are starting to ramp up purchases of everything from mortgage-backed securities to collateralized loan obligations after nearly two years of cutting back, adding fuel to a multi-month rally across credit markets. Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. have been boosting purchases of top-rated CLOs. Commercial bank holdings of mortgage bonds are also on the upswing, climbing 12 of the last 15 weeks, according to Federal Reserve data. It comes as Wall Street buyers added $41 billion of securities to their portfolios in the three months through December, according to data compiled by Citigroup, ending a streak that saw them shed more than $800 billion since March 2022, separate Fed data show. Amid an upturn in deposits, banks are searching for ways to put this new cash to work. The traditional option — boosting lending — is hard to do right now, though, after two years of interest-rate increases that curbed loan demand and pushed up defaults. That’s left banks to park more money in high-quality securities that they believe will boost returns without heaping on too much credit risk. The renewed demand, while thus far modest, is already helping propel gains across credit, market watchers say. Spreads on new CLOs have tightened to the narrowest in more than a year-and-a-half in recent weeks, while MBS have rebounded from historically cheap levels . . . #banks #financials #credit #CLOs #structuredfinance #fixedincome #MBS