When financiers and governments redesigned the financial system in order to make it safer after the debacle of 2007-09, most of them imagined that a shock as bad as the subprime fiasco would be a generation away. In fact it arrived only a decade or so later. Lockdowns have led to a savage recession that is expected to produce huge loan losses as firms and households suffer.
So are too-big-to-fail banks really safer? The latest stress tests conducted by the Federal Reserve suggest the answer in America is “yes”. On June 25th the Fed released the results of its annual exercise, which compares banks’ buffers with the losses they would face in a downturn. In a pessimistic “u-shape” scenario, in which the economy faces prolonged social distancing and repeated outbreaks of the virus, the Fed reckons that banks would face total losses of over $700bn on their collective loan book. The hit is well above the worst case of $465bn that was envisaged in 2009 when the Fed did its first stress test. This year’s scenario implies cumulative losses on loans of about 10%, above the 7% loss rate actually experienced during the subprime crisis.
Happily, the Fed concludes, in this u-shape scenario the banking system’s total core-capital ratio would fall from the present 12% to a still-passable 8%. Some banks might have to limit the dividends they pay their shareholders in order to bolster their capital positions—indeed, on June 29th Wells Fargo said it would have to cut its payout. But this is a small price to pay. Instead, the banking system’s new resilience means that customers and investors did not rush to withdraw funds as in 2007-09. Banks were seen as safe.
Lenders in turn have had the resources to extend overdrafts to firms in need. Risky activities have migrated beyond the banking system. The result is that even though taxpayers have not had to bail out banks, they have once again been exposed to huge potential losses.
The Fed has made purchases in, and extended implicit guarantees to, many markets—including those for junk bonds and exchange-traded funds—and is also lending directly to firms. At Capital Biz Solutions we have noticed that lender guidelines are tightening as they continue to mitigate their risk in this challenging environment. However, we continue our dialogue with lenders nationwide and have been successful in acquiring working capital, for all industries, including bridge financing, real estate funding, term loans, and revolving lines of credit. Please visit us on the web at
https://www.capitalbizsolutions.com/ or simply call us at 508 864 7758. We are to assist you with your working capital needs.
