Unaddressed Concerns Lurking Behind Fed's Positive Stress Test: The Most Vulnerable US Banks
Portfolio Pulse from Piero Cingari
The Federal Reserve's 2023 stress tests showed that all 23 large U.S. banks have sufficient capital to absorb hypothetical losses of $540 billion in a severely adverse scenario. However, concerns remain over the vulnerability of certain banks to a collapse in the commercial real estate (CRE) market and unrealized fixed income losses. Goldman Sachs, Morgan Stanley, Citizens Financial Group, Northern Trust, and Deutsche Bank are among the most vulnerable to a CRE collapse. Bank of America is facing significant paper losses due to its decision to invest pandemic-era deposit inflows into debt markets.
June 29, 2023 | 3:38 pm
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POSITIVE IMPACT
The Financial Select Sector SPDR Fund rallied 1.4% on the news of the positive stress test results.
The ETF, which represents bank stocks, rallied on the news that all 23 large U.S. banks passed the Fed's 2023 stress tests, indicating investor optimism in the sector.
CONFIDENCE 90
IMPORTANCE 60
RELEVANCE 70
NEGATIVE IMPACT
Bank of America is facing significant paper losses due to its decision to invest pandemic-era deposit inflows into debt markets.
The bank's decision to invest the majority of its $670 billion of pandemic-era deposit inflows into debt markets when bond prices were high and yields were low has resulted in over $100 billion in paper losses.
CONFIDENCE 90
IMPORTANCE 80
RELEVANCE 90
NEGATIVE IMPACT
Citizens Financial Group is among the most vulnerable to a collapse in the commercial real estate market.
The bank's exposure to commercial real estate loans, which are expected to drop by 40% in a severely adverse scenario, could lead to substantial losses.
CONFIDENCE 85
IMPORTANCE 70
RELEVANCE 80
NEGATIVE IMPACT
Deutsche Bank is among the most vulnerable to a collapse in the commercial real estate market.
The bank's exposure to commercial real estate loans, which are expected to drop by 40% in a severely adverse scenario, could lead to substantial losses.
CONFIDENCE 85
IMPORTANCE 70
RELEVANCE 80
NEGATIVE IMPACT
Goldman Sachs is among the most vulnerable to a collapse in the commercial real estate market.
The bank's exposure to commercial real estate loans, which are expected to drop by 40% in a severely adverse scenario, could lead to substantial losses.
CONFIDENCE 85
IMPORTANCE 70
RELEVANCE 80
NEGATIVE IMPACT
Morgan Stanley is among the most vulnerable to a collapse in the commercial real estate market.
The bank's exposure to commercial real estate loans, which are expected to drop by 40% in a severely adverse scenario, could lead to substantial losses.
CONFIDENCE 85
IMPORTANCE 70
RELEVANCE 80
NEGATIVE IMPACT
Northern Trust is among the most vulnerable to a collapse in the commercial real estate market.
The bank's exposure to commercial real estate loans, which are expected to drop by 40% in a severely adverse scenario, could lead to substantial losses.
CONFIDENCE 85
IMPORTANCE 70
RELEVANCE 80