Thread by @NathanDallon

ITS THE JUNE 2021 STRESS TEST RESULTS!!!!!

A quick thread.

federalreserve.gov/publications/f…

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The purpose of the stress test is to determine
"...whether bank holding companies and U.S. intermediate holding companies with $100 billion or more in total consolidated assets are sufficiently capitalized to absorb losses during a hypothetical recession...

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...ensuring that they can continue to be able to lend to households and businesses."

What does it mean for a bank to be "sufficiently capitalized" you ask? Well, it means the difference between a bank's liabilities (what banks owe)...

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...and assets (the worth of things the bank owns) is POSITIVE and not NEGATIVE.

19 banks participated in this round of stress tests.

(see below)

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I do not pretend to be an expert on how the Fed models work, what "sufficiently capitalized" means for each bank (meaning HOW MUCH in the black must each bank be, though page 10 lays that out, I still don't under stand it).

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All I wanted to highlight is that the ASSET side of the ledger is all sorts of complicated since mortgages and debt instruments are all VARIABLE in a scenario where the economy tanks.

Meaning the asset side of the ledger can deflate FAST.

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So, which asset is the bank's favorite to keep capital ratio's good for stress test purposes?

Why, US Treasuries of course!!! During downturns, those still pay off at the rate purchased. They are liquid, reliable, and the best collateral ever.

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Important to note that Bank Reserves are not counted in the stress test.

I SAY AGAIN, BANK RESERVES ARE NOT COUNTED IN THE STRESS TEST.

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That matters since MANY still believe that LOTS OF BANK RESERVES mean the banks are likely to lend.

They will not. The reserves DO NOT protect banks during the stress tests.

Banks want those treasuries. Bad. Real bad.

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Anyway, happy Thursday everyone.