The Irish News’ Post

The 2024 severely adverse scenario is that of a typical crisis, characterized by steep declines in interest rates and asset values, plummeting equity and real estate markets, and soaring credit spreads and unemployment rates. Highlights include a 40% decline in commercial real estate, a 36% decrease in housing prices and an unemployment peak of 10%

"A major review of the Bank of England claims its systems are not equipped to handle modern data loads" says the article in today's AFR (via The Telegraph, London). Very scary as these people set interest rates. The solution? FinTech. Yes, the BofE needs an overhaul of it's ancient IT systems - it needs fintech services that deliver faster, more accurate information on what's going on in the financial markets (ie home loans, lending, FX, bonds; volumes, volatility, positions, risk weightings etc etc). Don't just think of fintech as B2C and B2B - the fintech future is FinTech-Central Bank Partnerships (maybe a category for the FinTech Awards 2025??); https://lnkd.in/gchJjF4q

International Bank Study, Shows Mega Banks In The U.S. Produce Financial Instability And More Severe Crises. According to wallstreetonparade.com– It took eight years of research to compile a data set of annual balance sheets of more than 11,000 commercial banks dating back to 1870 in 17 advanced economies. And in every country, the study arrived at the same finding: concentrating the banking system in the hands of five or less giant banks leads to financial instability and more severe financial crises. The bank balance sheets of the following countries were examined: Australia, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The 150-year banking study is titled: “Survival of the Biggest: Large Banks and Financial Crises.” Its authors are Matthew Baron of Cornell University; Moritz Schularick of the Kiel Institute for the World Economy and Sciences; and Kaspar Zimmermann of the Leibniz Institute for Financial Research SAFE. Any analysis that says “x caused the 2008 financial crisis” is so simplistic that it’s more wrong than right, and it doesn’t matter which x the analysis points the finger at. https://lnkd.in/ed_Dxima

Bank of England review: Be careful what you ask for When the Bank of England asked former Federal Reserve leader Ben Bernanke to assess the bank's economic modelling, did they expect such a brutal report? His 75-page report into the Bank of England's activities is both insightful and alarming, but it does suggest a number of changes that would drag the Old Lady of Threadneedle Street into the modern era. Monetary policy framework As we have written on numerous occasions, the Bank of England was well behind the curve when it came to recent growth in inflation, which peaked at 11.1% last year. Consequently, this rate was much higher than that of the US and the Eurozone and left the UK exposed. While many of us are well aware of the Bank of England's 2% inflation target, did you know that the basis of the monetary policy framework has remained unchanged since Tony Blair was in political power in 1997? Underinvestment in technology The Bank of England’s forecasting tools were seen as lacking somewhat by Ben Bernanke, highlighting the switch to human perception in the depths of the financial crisis of 2008. It was also noted that the Bank of England needs to give proper credence to the influence of the labour market, productivity problems, and interactions between prices and wages. Floating alternative strategies and views Currently, the MPC interest rate decisions are based on managing market expectations (rather than the bank's expectations), and discussed at their regular meetings, with comments released to the public. Ben Bernanke believes that the Bank of England should issue regular market commentary and reviews and also release the personal opinions of the MPC members. In simple terms, the Bank of England needs to enhance transparency and create a more active communication channel with markets. Summary While some were disappointed that Ben Bernanke fell short of demanding a range of significant changes at the Bank of England, there were some critical observations and important suggestions. Whether these will be considered remains to be seen, but at least the Bank of England seems more open to outside opinion, a common criticism over the years.

The Federal Reserve Board recently announced the result of its latest #stresstests on #USbanks, where 31 institutions - all with $100 billion of assets or more - where under the microscope for potential losses of $685 billion.    Whilst all the banks passed - some with flying colours - there are some interesting things to note concerning #regionalbanks, particularly in terms of their exposure to US #commercialrealestate.    1. The 2024 supervisory 'severely adverse' scenario included heightened stress in commercial real estate, projecting a 40% decline in CRE prices.    2. Projected Losses: Despite the increased projected losses, the CRE loss rate for the 2024 stress test remains the same as the 2023 stress test, at 8.8%. This indicates that projected losses, while significant, are consistent with previous years.    3. Sector-Specific Changes: The document notes an increase in projected losses on loans to office properties, reflecting deteriorating fundamentals in the office segment. However, these are offset by a decline in projected losses on loans to hotels and retail properties, where market fundamentals have improved over the last year.    4. Focus on CRE Debt: Large bank exposure to CRE debt remains an area of focus for Federal Reserve supervisors, underscoring the importance of monitoring and managing risks in this sector.    While the overall CRE loss rate remains unchanged from previous years, there is specific concern about the office property segment, and regional banks' exposure to CRE is a critical factor considered in the stress tests.    https://lnkd.in/ewpFYU8h you very much. #fedstresstests #bankcapital

Some weeks ago the Bank of England published the so-called Bernanke Review, an investigation by former Fed chair, Nobel laureate and Princeton Professor, Ben Bernanke on the bank's monetary policy forecasting and communication practices. I have great respect for this level of transparency and accountability. While it is hard to disagree with the shortcomings he identified, I am not amused by one of his recommendations: to replace the fan chart with paths for inflation under different scenarios. ❌ This is a step back in my opinion. Fan charts are meant to convey uncertainty in any projection and serve an extremely useful purpose, to remind users not to place too much weight on point forecasts! Commentators are usually quick to point out 'forecast errors' when any point forecast misses the data outturn, ignoring the fact that the probability of the point forecast hitting the data spot-on is not as high as one might think. The forecast *distribution* instead is more informative and likely to capture the data. As a Bayesian, most of the time I think in terms of some form of a probability distribution. ⚠ Of course, a fan chart which is too wide is self-defeating; few would be satisfied with an inflation projection for next year which is anywhere between, say, -10% and +20%. Similarly, a fan chart which is always symmetric (always judges risks to be balanced) is also unconvincing. ✅ Scenarios are complementary, not a substitute to fan charts. They are important story-telling devices under different sequences of events, but they are also point forecasts, and the dynamics under one scenario can be far more likely than those under another. Scenarios can also reflect policymakers' subjective expectations, which have their merit too since these draw upon their expertise. I am happy to note that in is reply, the Bank of England has taken a cautionary reaction to this particular critique, and has not committed to the outright removal of fan charts. Instead, it emphasises the paramount importance of effective communication strategies. I look forward to see what changes it implements. https://lnkd.in/dq-UmPAF

The Bank of England has confirmed that the UK’s leading banks have successfully navigated their latest #stresstests, raising questions about the true implications of these results for the sector's stability and future #risks. Key Data Points: ⭕ Capital Adequacy: Banks maintained a strong capital buffer, with an average Common Equity Tier 1 (CET1) ratio of 13.5%, well above the regulatory minimum of 11%. However, concerns persist about whether these buffers are sufficient for more severe #economic shocks. ⭕ Liquidity Resilience: The tests revealed that banks' #liquidity coverage ratios (LCR) comfortably exceeded the required 100%, averaging 135%. This indicates a solid liquidity position but may not fully account for potential market volatility or unexpected liquidity demands. ⭕ Stress Scenarios: The scenarios included significant GDP contractions and sharp asset price declines. While #banks performed well, the effectiveness of these scenarios in reflecting real-world stressors, like geopolitical instability or climate-related #risks, is debatable. Critics have argued that the stress scenarios used may not capture extreme but plausible risks, such as major geopolitical events or severe climate impacts, potentially underestimating banks' vulnerability. 👉 Explore the detailed analysis of the stress tests and their implications here: https://lnkd.in/e5k8p96H 💬 What are your thoughts on the effectiveness of these stress tests in reflecting true financial stability? #BankStressTests #FinancialResilience #CapitalAdequacy #LiquidityCoverage #RegulatoryStandards #GlobalTreasurer

Asian Banking & Finance recently published excerpts from Economist Intelligence: EIU's Financial services outlook for 2025. “Banks enjoyed several years of strong profits when interest rates were high, but their profitability will decline in 2025 as interest margins narrow,” said Swarup Gupta, lead analyst for financial services, Economist Intelligence Unit (EIU). “We expect corporate borrowing to rise further as workers return to the office, although mortgage underwriting rules will tighten, especially in the US,” the report said. “[Banks] are already using AI to improve their predictive capabilities, but the technology’s ability to increase the efficiency of the existing workforce will become visible as soon as next year,” it said. Gupta expects Basel III implementation to be delayed and additional capital requirements to be watered down. “We also expect continued debate over the Basel III endgame after the US weakened its proposals,” Gupta said. #EIU #TheEconomist #financialservices #banking #AI #Baselendgame

📰 Breaking News: UK bank increases net interest income guidance as central banks hold rates steady longer than expected 📰 In recent months, we've witnessed central banks worldwide maintaining interest rates at historically low levels, contrary to the expectations of many industry experts. This strategic move has sparked a ripple effect, notably observed in a significant UK bank that has revised its net interest income guidance upward in response. What does this mean for the financial landscape? 📈 Improved Profit Margins: By holding interest rates steady, central banks have inadvertently provided commercial banks with a golden opportunity. As economic activities pick up and borrowing accelerates, banks can now enjoy better profit margins, thanks to an extended period of lower borrowing costs. 🔍 Enhanced Financial Planning: Stability in interest rates allows for more predictable financial planning. With interest rates becoming a stable factor rather than a fluctuating risk, both businesses and individuals can strategize their investments and spending more effectively. 🌐 Broader Economic Implications: The decision to hold rates in this low zone further indicates a cautious yet optimistic outlook on global economic recovery. It suggests that central banks aim to support growth and employment in the short-term while keeping a keen eye on potential inflationary pressures. 💼 Strategic Adaptation: The proactive shift in income guidance by the UK bank exemplifies strategic adaptation to regulatory environments and economic signals. Other financial institutions may take similar steps as they reassess their financial outlooks in light of prolonged low rates. 🔮 The Road Ahead: As we move forward, it's crucial to monitor whether this steady rate environment persists and how it will affect various sectors beyond banking. Policymakers' next steps will be vital in shaping the economic trajectory, setting the stage for both opportunities and challenges in the financial realm. In conclusion: - Continuous monitoring of central bank policies is imperative for actionable insights. - Businesses should capitalize on low-interest-rate environments, fostering long-term growth. - Financial institutions will need to stay agile, reassessing their projections and strategies accordingly. Here's to navigating these dynamic times with intelligence and foresight, embodying adaptability in a complex financial ecosystem! #Finance #Banking #InterestRates #EconomicStrategy #CentralBanks #FinancialPlanning #ProfitMargins #EconomicOutlook #UKBanking #StrategicAdaptation

09/26/2024 Markets Boards, Policy & Regulation Regulatory Oversight Australia central bank warns households against over-borrowing once rates fall September 26, 20243:32 AM GMT+2Updated 5 hours ago SYDNEY, Sept 26 - Australia's central bank on Thursday cautioned borrowers against taking on excessive debt when interest rates start to fall and risking a boom/bust cycle, though it judged the financial system remained resilient overall. In its semi-annual Financial Stability Review, the Reserve Bank of Australia (RBA) again highlighted the resilience of households, businesses and banks in the face of decade-high interest rates and painful inflation. A small but growing share of mortgage holders were falling behind on payments, and an increasing number were making the difficult choice to sell their homes to escape default. Yet, the share of borrowers experiencing severe financial stress remains small at less than 2%, the RBA said, while 0.5% of loans in arrears were also in negative equity. The RBA expects household budget pressures to ease once interest rates start to fall, but also saw dangers in that. "Domestic vulnerabilities could increase if households respond to any easing in financial conditions by taking on excessive debt," said the RBA in a 45-page review, warning that the risk could be magnified if lending standards drop. It still judged that the vast majority of borrowers would be able to service their debt under a range of scenarios and with some selling their properties to repay their loans and avoid defaulting, the risk to the financial system remains limited. The central bank has kept rates steady since November, judging that the cash rate of 4.35% - up from a record-low 0.1% during the pandemic - is restrictive enough to bring inflation to its target band of 2-3% while preserving employment gains. Policymakers have ruled out a near-term reduction in interest rates as it waits for inflation to cool further. Fortunately, data out on Wednesday showed headline inflation slowed to 2.7% in August, back in the target band, while the core measure eased to 3.4%, keeping a rate cut by the year end in play. Swaps imply a 72% chance for an easing in December. Much of the review was focused on risks from offshore, where operational vulnerabilities from a digitalised world, imbalances in China's financial sector and disorderly adjustments in global asset prices could spill over to Australia's financial system. Page 1 continue An ibis bird perches next to the Reserve Bank of Australia headquarters in central Sydney, Australia February 6, 2018.