Inflation: Three Outcomes that Could Test Capital Resiliency

Inflation | Capital | Credit Stress Testing

Leverage and net worth ratios have declined, on average, by over 1% since the onset of the pandemic, driven by inflated balance sheets following the flood of deposits into the banking system. While earnings were strong over that period, they were not enough to offset the pressure on leverage ratios.

Fast forward to today, and the earnings tailwinds of 2020 and 2021 have faded (i.e., PPP activity, allowance reversals, mortgage income, reductions in deposit costs, etc.), and asset levels remain elevated.

“. . . triple-barreled tightening — rate hikes + QT + fiscal tightening — will result in a considerable slowdown, people should be aware the odds of recession next year are high. That is not speculative, it is common sense.”

– Chris Low, FHN Financial [1]