Stressed?
January 21, 2025
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–The titans of tech were on display at the inauguration. Musk, Cook, Zuck, PichAI, Bezos. I didn’t watch much, but what I didn’t see were banking and finance giants. I guess they’re in Davos.
–BBG has an editorial today: Fed’s Bank Stress Tests Are Facing a Stress Test.
https://blinks.bloomberg.com/news/stories/SQ8BWKT1UM0W
The article notes that at the four largest US banks, equity capital as a share of total exposure has declined from around 7.2% in 2017 to 6.1% now. A Fed note seeking public comment on Stress Tests from Dec 23, 2024 was cited. (Seems like a lagged response from the BBG editorial staff).
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20241223a.htm
–My thought is that the unwritten Fed mandate of financial stability might get thrust into the limelight. perhaps overwhelming inflation and jobs. Trump embodies volatility, and the Trump coin highlights crypto risks and a gambling mentality. Perhaps of larger concern is the rise of private credit. I did not read the source article, but Almost Daily Grants (ADG) emphasizes comments made to the FT by Nick Moakes (Wellcome Trust CIO):
“if the world gets a little bit more difficult economically, I think there are some accidents waiting to happen in the private credit world. . . [the industry] has sucked in an enormous amount of capital. That has meant that the lending standards that are applied in certain parts of private credit markets have diminished.”
…“You can construct all kinds of cataclysmic scenarios where they take each other down, but actually, they won’t, because what they’ve done is very clever. This stuff is all sitting in LP vehicles. So, the liability is all with the investors.”
–Another ADG article notes: “For context, buyout firms issued $68.3 billion in loans to pay themselves dividends last year, the second-highest total on record behind 2021’s $73.2 billion haul.” This sentence refers to dividend recaps, where buyout firms issue debt in order to extract cash through dividends. The amounts cited aren’t particularly large. But the broader context encompasses all of the potential stress just underneath the TBTF financial behemoths. Bank stress tests are simply a high visibility signaling mechanism. The risks are skimming below the surface.
