JohannesBorgen Profile picture
Nov 26, 2021 11 tweets 4 min read Read on X
The German financial stability review has lots of other interesting charts. Here are the ones I found the most compelling. A thread to wake you up on a lazy black Friday.
This is the equivalent of the ECB inflation spider chart... but for corporate insolvencies. Buba keeps predicting they'll spike.. but it just does not happen. Tbh this is seriously mysterious and somehow worrying.
And you can't blame Buba for those forecasts because we're really in extremely weird times. Here's how previous crises have looked like in terms of GDP/insolvencies.

This 2020 crisis totally inverts the GDP/insolvency regression line and makes it a >0 slope
🤪
And Buba is not alone in those forecasts: here's how German banks view the probabilities of defaults on their loan books : sharply going up... and yet, still no genuine defaults.
Interestingly, this rise in probabilities of defaults is entirely driven by corporate loans, because the view on real estate lending (residential AND commercial, which is more surprising) is still a blue sky scenario : PDs keep going down.
Going back to the earlier topic of rates, Buba has a nice chart about rising rates and the level of danger for insurers: at what point would they face such MtM losses that they would not be able to honour guarantees on policies?

Still plenty of room, but 3% is not a high rate!
A fun chart, even if we're clearly in #chartcrime territory: working from home will increase cyber risk. Not a big surprise but nice to have some numbers (even if the regression is crap)
Now maybe to their most controversial chart. Buba has done a climate stress test. NOOO NOT ANOTHER ONE, I can hear you say. But this one is different.

Here's the "asset base" and the outcome: a nothing burger. max 10bps of credit risk, which is not really different from 0.
Buba even "priced" the uncertainty around this & they're pretty confident climate risk is indeed a nothing burger for banks : 12bps is the max.
This is really a very different take from all the doomsday scenarios we're seeing here and there to justify climate action from the banks. That's why it's going to be controversial.

If you read me often, you know I have sympathy for that approach because ...
...I also believe the risk for banks is grossly overstated and it's basically a supervisory trick to have banks on board with the climate transition.

But I think we should be honest, admit the risk for banks is minimal, and still convince them that they must do the right thing!

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More from @jeuasommenulle

Jul 2
France is famous for wine, cheese, Versailles, football… and credit ratings.

Today I’m going to tell you how French banks will save billions of capital thanks to an old institution & a magic trick

Read till the end, it’s the wonderful story of a ruling worths tens of billions
Let’s go back to Deutsche Banks’ recent disclosure that Basel 4 will cost them 15bn of capital (with 13% CET1r assumption).

See linked thread:

It all boils down to the fact that under Basel 4 banks will have to calculate their risk exposures using the max of

i) their internal models’ calculations and

ii) 72.5% of the “Standard” (=supervisory) models, also called the output floor.
Read 16 tweets
Jun 30
Why is Deutsche stock hammered today?

An old theme is coming back to haunt them: Basel 4!

Quick thread. Image
After almost 10y of discussion the package was finally enacted with full implementation in 2033.

Everyone felt, after many EBA reports & banks' disclosures, that impact would be mild.

But for first time banks are publishing capital ratios w/ the new rules and for DB it's ugly
How does it work? Banks are still allowed to use internal models, but the RWA (in 2030/2033) must be at least 72.5% of the standard (non internal models) RWA. ("output floors") and for DB that's a 33% increase!
CET1r would go from 13.8% to 10.35%! Ouch! Image
Read 4 tweets
Jun 23
Why is the latest EC proposal on securitization a big deal for banks and how does it change the SRT market?

A slightly geeky thread - with some backround on the SRT market if you're not aware of this important market.
First what’s a SRT?

Following secular finance practice of reinventing the wheel but changing its name, the new trendy capital optimization transactions are “significant risk transfers”, but they’re just good old securitizations (invented in the 1860s 😊.)

(cash or synthetic) Image
The reason they’re now called SRT is a regulatory one.

The 2013 CRR (Art 244/245) allowed banks to get capital relief under some conditions, essentially that “significant risk” was transferred to someone else.
Read 15 tweets
May 23
Are you readyyyyy for LDI take 2?

Hear me out. Something’s brewing in the UK Gilt market.

#LettuceLiz Image
As the chart above shows, the cash swap spread has moved significantly & one-way recently.

Spread to swap is now 50bps.

But EU & UK insurers book their liabilities at NPV using swap curves, not UKT curves.

Still with me ?
This means that Gilts have become an excellent investment for life insurers.

The CSM for new business is going down (but still positive) but the charge for credit is now 0 so ROE increase significantly.

So far so good.
Read 7 tweets
Apr 8
Bloomberg has some nice charts on the tariffs’ impacts.

The first one argues that tariffs on China are coming globally: too many countries will see a spike of imports from China & that's not sustainable. Image
The second shows GDP impacts, taking into account direct effects + indirect via trade partners (using a WTO macro model, so, you know...)

SE Asia impact is massive, -1% for EU, -1.3% Japan and -2.5% Korea. Mexico bonanza. Image
Some details on who’s going to stop which exports – very interesting split (especially if you try to model loan losses 😊). Overall 30% drop in US imports of goods (with retaliation modelled as 50% of US). China is -85%, Vietnam -75%, Taiwan, Japan, Korea Thailand -50%, EU -40%. Image
Read 4 tweets
Mar 5
A week ago the Swiss gvt bravely decided to leave the decision on UBS capital requirement to Parliament.

I’m not sure that was such a great idea – as the recent proposal of the Swiss Social-Democratic Party shows.

If implemented, it would be a massive game changer. A thread.
First, a reminder: the SDP is not a fringe party, they’re #2 in the National council (41/200) & #3 in Council of States (9/46) & they’re also not particularly extreme (I mean, Swiss rarely are.)

But their proposals for UBS are a bit wild.

Let’s unpack.
1) A new leverage ratio surcharge of 3% for assets >300bn$ - in practice it means 40bn$ more capital required (out of approx 85bn of equity).

Ouch.

And having the biggest req on a non-risk adjusted basis is not exactly a very safe approach imho
Read 12 tweets

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