COVID-19 tests resilience of banks | Corporate bond investors see return of volatility | Corporate debt downgrades a reality of pandemic
August 11, 2020
IACPM SmartBrief
Credit Markets
Europe's banks are bracing for a wave of corporate and retail defaults at a time of ultra-low interest rates and with lower profitability than their US rivals.
Full Story: Financial Times (subscription required) (8/10) 
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The gap between investment-grade corporate bond yields and the cost of hedging against default in the derivatives markets highlights investors' apprehensions about a resurgence of market volatility due to the coronavirus.
Full Story: The Wall Street Journal (tiered subscription model) (8/7) 
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Companies dealing with the challenges of the ongoing coronavirus pandemic are increasingly faced with credit downgrades that move them from an investment-grade to the non-investment-grade category. So far, most companies have been able to maintain a BBB rating.
Full Story: Bloomberg Professional Services (8/5) 
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A tradable index of credit default swaps linked to ESG-friendly firms is so far failing to gain traction in the marketplace.
Full Story: Financial Times (subscription required) (8/5) 
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Some banks are selling their Paycheck Protection Program loans to non-bank entities eager to garner the business. New York's The Loan Source, which was formed specifically to deal with PPP loans, purchased 20,000 loans from 14 lenders and expects to purchase more.
Full Story: American Banker online (subscription required) (8/5) 
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Intesa Sanpaolo's planned merger with Unione di Banche Italiane proves bank consolidation in Europe is possible, Rochelle Toplensky writes. However, obstacles remain, such as uncertainty over the quality of banks' loan books amid the coronavirus pandemic.
Full Story: The Wall Street Journal (tiered subscription model) (8/7) 
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The concentration of stock ownership in the 10 biggest institutional investors in the US is a key factor driving high volatility and mispricing on equity markets, an academic study finds.
Full Story: Financial Times (subscription required) (8/8) 
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Regulatory and Accounting Issues
The Federal Reserve has unveiled the amount of extra capital required of the largest banks included in the 2020 stress test, which had found they would withstand heavy capital losses. The common equity Tier 1 capital requirement comprises a minimum CET1 capital ratio of 4.5% and the "stress capital buffer" requirement, plus potentially a surcharge for the eight global systemically important banks in the US. This marks the first time the Fed has imposed bespoke capital requirements, which apply starting Oct. 1.
Full Story: Reuters (8/10),  American Banker online (subscription required) (8/10) 
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Providing banks regulatory relief is an essential policy response to the COVID-19 crisis but one that creates a number of prudential oversight challenges, warns the Financial Stability Institute. This paper notes the most pressing of these challenges will be managing the withdrawal from these support measures.
Full Story: Bank for International Settlements (8/10) 
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Analysts warn that proposals by Chinese authorities to crack down on the shadow banking sector could restrict lending to the country's small and medium-sized businesses.
Full Story: Financial Times (subscription required) (8/5) 
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Trends in Credit Portfolio Management
The coronavirus disruption has increased demand for alternative data as investors find traditional financial market indicators less indicative of the economic slowdown.
Full Story: Financial Times (subscription required) (8/3) 
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A buy-side risk survey found that the coronavirus disruption caused 87% of investors to turn to creative stress-testing, using custom scenarios to get through the selloff in March. Only 67% said the value-at-risk statistical method was useful during the crisis.
Full Story: Risk (subscription required) (8/10) 
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Most-clicked by Credit Portfolio Management Professionals
The world can be better if there's love, tolerance and humility.
Irena Sendler,
nurse, humanitarian, social worker
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