Bond markets in the U.S., U.K. and Europe are signaling rising odds of a global recession. However, we are in unchartered territory. Financial institution risk managers urgently need to evaluate their risk models in order to mitigate credit, market, liquidity, and operational risks.
Trump’s trade wars are exacerbating problems in the U.S. agricultural sector. The downturn is being felt in state revenues, agricultural loan performance and corporate earnings. Banks with loan exposures to the Midwest need to review their portfolios closely.
Consumer advocates fear that an OFR working paper ‘The Effects of the Volcker Rule on Corporate Bond Trading: Evidence from the Underwriting Exemption’ will be used by Volcker Rule opponents to weaken this important post-financial crisis rule written to protect bank depositors and taxpayers.
In an economic or market downturn, ratings downgrades and rising illiquidity of collateralized loan obligations (CLOs), will compel banks to increase their Basel III regulatory capital to sustain unexpected losses. If they cannot increase capital, this could lead to fire sales of their other assets.
The Federal Deposit Insurance Corporation released its 2019 risk review report with key credit risks to banks. Given that this is the regulator that has to take banks into receivership when they fail, its analysis and warnings are very important to market participants, regulators, and legislators.
Republican senators from the Senate Banking, Housing, and Urban Committee sent a letter to the chairs of the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. I have several concerns with this letter, because these senators continue to push for weaker regulations for big banks so late in the credit cycle. Last summer, a similar letter was sent by Republicans to the same bank regulators.
Last year I wrote several pieces about the potentially negative effect of Trump’s trade wars on companies, the agricultural sector, workers in every U.S. state, and on banks. Unfortunately, recent Gross Domestic Product data are now the negative effect of Trump’s multiple front trade war. Imports increased which exports decreased by over 5%; this increased the trade deficit he claimed that he wanted to decrease. Also worrisome is that business investment declined by 0.6 percent; this is the first such decline since the first quarter of 2016.
In the last couple of weeks, a number of legislators, journalists and I have written about what the rapid rise of private equity investments means to Americans. I welcome the introduction of the ‘Stop Wall Street Looting Act of 2019,’ because we need to analyze seriously what the positive and negative effects are of private equity to ordinary Americans. Earlier this week, I highlighted balanced, as well as pro and con points about private equity. Since the Federal Reserve is likely to cut rates this coming week, I believe that the chase for yield will only intensify. Private equity will continue to look for deals, and private equity executives will have an easier time loading up companies with debt from both banks and non-banks.
A few weeks ago, I wrote about how highly leveraged zombie companies threaten the global economy. After spending the last few days analyzing data and reports from the Federal Reserve, the Institute of International Finance, Fitch Ratings, Debtwire, and S&P Global Market Intelligence, unfortunately, I am even more worried.
Global bank rating outlooks are skewing negative primarily due to UK and Latin American banks. Given this late in the credit cycle, the direction of ratings is even more important to monitor.
The significant growth of private equity and rising concerns about Americans who have lost their jobs in a number of private equity-backed companies have led Democrats to propose ‘Stop Wall Street Looting Act of 2019.’ Key Democratic senators and representatives are supporting this bill.
Irrespective of what lobbyists, politicians, or even regulators might say, banks own over half of leveraged loans and CLOs globally. In a downturn, growing illiquidity in these products would force banks to raise capital buffers, possibly leading to fire sales, not only of CLOs but other assets. .
Global rating agencies are not exhibiting enthusiasm for Deutsche Bank’s restructuring plan. I certainly am not. The perennially troubled bank needs to show credible restructuring, risk management, and liquidity plans, as well as raise capital to sustain unexpected losses.
Deutsche Bank’s significant opacity means that we do not know how much counterparty risk banks, non-banks, corporations, sovereigns, central banks, and municipalities around the world have to the troubled bank. Bank regulators have the power to require banks to measure their exposure to Deutsche.
Zombie companies could endanger financial stability as the global economic downturn is deeper than expected. One of the biggest signs of overheating in the global economy is the level of below investment grade corporate debt and the $3 trillion dollars of leveraged loans. As prolonged trade tensions impede corporations’ ability to plan for the future, geopolitical tensions intensify, and the Chinese continue to deleverage, any of these factors could trigger a significant recession in multiple countries.
On the eve of the ten year anniversary of the G-20 Pittsburgh Summit, Financial Stability Chair Randal Quarles reports on progress made with important financial reforms. He also warned of important vulnerabilities in the global financial system.