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can esg violation among countless others this news story from bloomberg had me laffing so hard it hurt despite the action being rather novel banning investment in us treasuries over environmental social and governance esg grounds it is undoubtedly true that america is an esg disaster offhand we can cite endless esg offenses that the us has perpetuated on its citizens and the rest of the world among others environmental being the world s second largest carbon emitter and historically speaking by far the world s largest social maintaining a persistent racial underclass of nearly half of blacks who have experienced inter generational poverty despite accounting for less than 15 of the overall population governance inflicting far more gun deaths annually than any other country by allowing largely unfettered sale and ownership of military style weapons now it is not news to anyone that the us is a super polluting racialized and hyper violent nation however it is news when others like the german state of baden württemberg start calling a spade a spade and put their money where their mouth is at that s because the new environmental social and good governance filters have resulted in us treasuries ending up on an investing blacklist due to america s failure to ratify a number of treaties in areas including women s rights and controversial weapons the bulk of baden württemberg s exclusions impact its equity and corporate bond portfolios the law establishes the united nations sustainable development goals the european union s taxonomy regulation and the paris agreement on climate change as the basis for future investment decisions lest you think it s just one german state objecting to america inc there are others back in germany meanwhile other states have taken similar steps baden württemberg the only one of germany s 16 states with a coalition government led by the greens was inspired by a similar law in the smaller state of schleswig holstein where bans apply to us treasuries as well as to fossil fuel companies and the pension funds of brandenburg hesse and germany s richest state north rhine westphalia are this year allocating as much as 11 billion to paris aligned stock indexes that exclude esg laggards alongside baden württemberg while i do not doubt the sincerity of these actions i am not convinced that what international esg related treaties a country has ratified should constitute the basis for assigning esg ratings to sovereign debt solability for instance has a global sustainable competitiveness index gsci that takes into account a number of indicators similar to conventional bond credit ratings ah well i guess it s the thought that counts for these germans read more a problem of unstressful us bank stress tests posted by emmanuel in americana europe at 5 04 2023 04 35 00 pm each day brings news of a distressed us bank about to take leave for the great central bank in the sky aren t us banks supposed to be safer now with the advent of greater macroprudential regulation a common way to gauge the soundness of banks is through the use of stress tests that simulate how these financial institutions would fare in the wake of financial well stress while americans bicker about whether the 2019 loophole exempting midsize banks holding between 100 to 250 billion in assets from stress testing led to their currently precarious situation even that may not have saved them comparatively speaking stress tests conducted stateside may not be sufficiently rigorous in simulating scenarios that are detrimental to financial sustainability it is fairly obvious that the higher rates we have these days are causing mismatches between what banks earn and what they must pay out oddly however recent us stress tests have not involved rising but rather falling interest rates see the illustration above and commentary from the peterson institute but it s not only for 2023 that this feature appears indeed every severely adverse scenario used by the fed since 2015 has the 3 month treasury bill rate ending up at 0 1 percent many historic episodes of severe economic downturn have indeed been accompanied by low interest rates as the fed used its policy tools to support aggregate demand but it is a bit strange that not since 2015 has a stress test involved rising interest rates one of the advantages of stress testing the banks every year is that their robustness to a variety of contrasting stresses can be assessed just repeating a broadly similar scenario year after year misses the opportunity to provide supervisors with potentially important information on vulnerabilities it can also result in policymakers assuming that the banks are robust to more types of shock than is really the case yet pointlessly repeating a broadly similar scenario each year is exactly what the fed has been doing as we can show here have other regulatory authorities been administering stress tests as lax and unrealistic as american ones thankfully for the rest of the world the answer is no the european central bank and remember that switzerland is not an ecb member for those thinking of a certain defunct bank has done its homework by simulating interest rate rises just as we are experiencing now overall our ecb analysis shows that the euro area banking sector would remain broadly resilient to a variety of interest rate shocks that would hold also under a baseline scenario of an economic slowdown in 2023 with the risk of a shallow recession such as the scenario included in the december 2022 eurosystem staff macroeconomic projections profitability would increase overall driven by higher net interest income however provisions would also increase reflecting potential difficulties for borrowers results for the overall impact on solvency remain on average fairly muted with great heterogeneity across banks within and across different business models the same hold true for australian banks down under their stress tests have likewise gamed out the implications of higher interest rates higher inflation and higher interest rates could lead to larger credit losses despite continued albeit slower economic growth the stress testing model can provide insights into the magnitude of potential credit losses and how important they could be for the capital positions of large and mid sized banks the model applies two principal stresses to examine the resilience of the banking system to higher inflation and interest rates higher inflation and higher interest rates on mortgages squeeze households real incomes making it more difficult to service debt which could lead to more defaults and larger credit losses for banks similarly higher input costs and higher interest rates passed onto business loans can make it more difficult for businesses to service their debts potentially leading to higher default rates see chapter 2 household and business finances in australia higher interest rates typically reduce the prices of housing and commercial property that are held as collateral by banks against their loans which increases lgds as well as pds on loans having conducted these sorts of tests well before 2023 australian banks look to be on firming footing while we hope that contagion does not spread to the eurozone and the land down under it certainly bears questioning why us stress tests did not involve scenarios involving deteriorating financial conditions due to sustained central bank rate rises in the face of persistently elevated inflation while the subject matter can come across as esoteric such things do impact joe average since taxpayers will ultimately foot the bill for cleaning up the mess caused by unstressful stress tests giving false comfort to financial authorities about the soundness of banks they regulate update 1 also see krishna guha s commentary in the ft he warns that while the ecb did conduct asset side stress tests e g holding low yielding securities it did not test how vulnerable eurozone banks were to depositor flight like what has happened stateside that said european depositors tend not to move their money around update 2 former federal deposit insurance corporation chief sheila bair says the same thing about the latest batch of stress tests that banks passed they did not model rising interest rates read more old articles on the bookshelf in the zone search this blog archive tags about 2024 6 may 3 african extractive industries prc neocolonialism turkish football reflects national malaise making us permian basin part of opec really april 3 2023 8 november 1 october 1 june 1 may 2 april 2 march 1 2022 4 december 1 june 2 may 1 2021 17 december 1 november 3 august 2 june 2 may 2 march 2 february 3 january 2 2020 34 december 4 november 3 september 1 august 2 july 6 june 7 may 5 april 6 2019 32 november 1 august 2 june 1 may 6 april 3 march 6 february 4 january 9 2018 77 december 8 november 2 october 6 september 4 august 6 july 8 june 4 may 8 april 8 march 7 february 6 january 10 2017 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