2024 Supervisors Symposium

Internal Use Only

On economic policy – four key changes in 2025 … sequencing matters; inflation risk elevated • Deregulation • Growth positive

• Growth positive; expect will be used to fund extension of 2017 tax cuts so not likely going away

• Tariffs

• Extension of 2017 tax cuts and maybe further tax cuts

• Fiscal policy to remain expansive

• Immigration/deportation

• Not in direct control of economic team; very important and wildcard

Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

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Internal Use Only

What should bank supervisors focus on? • In this environment, financial institutions need to maintain strong liquidity and limit market risk/sensitivity. • Banks shouldn’t go much beyond a duration of 2-3 in bond holdings

• Avoid agency MBS (as agency MBS are basically short interest rate vol unless funded with term borrowings at positive spread). • Some banks sold businesses generating fee income in 2023-2024 to cover losses related to interest rates – but did the team learn how to better manage ALM? Generally, no. • Management and board qualifications on ALM now matter. They didn’t when rates were near zero.

• Superior bank capital is also helpful in this environment. Areas of capital erosion include

• Unrealized losses • Double leverage at the hold co • Credit risk transfer transactions

• CRE risks are mounting with H4L interest rates.

Commercial Banking Program (CBP) Adam C. Sinn ‘00 Department of Finance

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