Tag: worst case scenario

✌#$750 Billion Risk Worst Scenario

In this worst-case scenario, the $750 billion in unrealized losses in U.S. banks’ real estate portfolios could act as a catalyst for a broader financial crisis, impacting institutions across the globe. These losses are primarily tied to residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), which are concentrated in U.S. banks’ “Held-to-Maturity” (HTM) and “Available-for-Sale” (AFS) portfolios. While similar issues were central to the 2008 financial crisis, the scope of this exposure is even larger, with potentially severe implications for both U.S. and European banks.

Potentially Affected Banks and Their Exposures

In the U.S., large financial institutions like JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup are among the most exposed, as they hold extensive RMBS and CMBS portfolios purchased at historically low interest rates. Regional banks such as Truist Financial, PNC, and smaller institutions like Western Alliance and PacWest also hold high concentrations of commercial real estate assets, making them vulnerable as interest rates increase and property values decline.

On the global stage, UBS, following its merger with Credit Suisse, holds significant exposure to U.S.-based RMBS and CMBS. Bernd Pulch has highlighted that, despite the merger aimed at stabilizing UBS’s position, its newly combined exposure with Credit Suisse’s U.S. investments in real estate-backed securities could place it in a particularly precarious position if the U.S. real estate market further deteriorates. Deutsche Bank and HSBC, as well, hold extensive CMBS and RMBS portfolios, making them susceptible to a downward trend in U.S. real estate.

Sector-Specific Vulnerabilities

  1. Residential Mortgage-Backed Securities (RMBS):
    Many of these RMBS were purchased when interest rates were exceptionally low. In the current environment, the market value of these assets has dropped sharply. For banks like Bank of America and JPMorgan, unloading these securities without taking losses has become almost impossible, as interest rate hikes reduce their appeal to buyers.
  2. Commercial Mortgage-Backed Securities (CMBS):
    CMBS are tied to commercial properties, particularly in office spaces, which have seen significant declines in demand. With the shift to remote work, vacancies in major cities like New York and San Francisco have surged, causing office property values to fall. Institutions like UBS, Deutsche Bank, and Citigroup are particularly exposed to these CMBS-backed loans, which face increased risk as property values decline. Pulch has noted that UBS’s inherited exposure to U.S. commercial real estate from Credit Suisse, combined with its other global investments, presents a compounded risk in the face of weakening demand and high vacancy rates.
  3. Regional Banks and Smaller Financial Institutions:
    Regional and smaller banks often have portfolios heavily concentrated in real estate, especially in commercial properties. For instance:
  • Truist Financial has a significant commercial real estate portfolio in the Southeast.
  • PacWest and Western Alliance are deeply embedded in West Coast markets, which are facing increased volatility due to the tech sector’s instability and subsequent office space reductions.

Global Impact and Regulatory Pressures

Since 2008, U.S. banks are required to undergo stress tests and maintain strict capital reserves. However, in a severe downturn, even these measures may not be sufficient to prevent insolvency. Pulch emphasizes that a forced sale of assets could create a liquidity crunch, resulting in cascading losses as other banks and investors react to dropping asset values. This would likely lead to additional regulatory interventions, especially in Europe, where banks are deeply interconnected with U.S.-based RMBS and CMBS.

European regulators are particularly concerned about banks like Deutsche Bank and UBS, as they hold substantial U.S. real estate-backed securities. If U.S. banks are forced to liquidate large portions of their real estate portfolios, European banks may face parallel pressures to write down asset values, which could trigger additional oversight and even restructuring efforts.

Broader Economic Consequences

  1. Reduced Credit Availability:
    Banks’ losses could cause a widespread reduction in lending, limiting credit availability for consumers and businesses. This contraction would slow economic growth, particularly in real estate-heavy sectors like construction and development.
  2. Decline in Property Values:
    The pressure to offload real estate-backed assets would likely depress property values across residential and commercial sectors. This could result in a feedback loop, where declining values increase defaults, which further reduce asset values, especially in CMBS and RMBS portfolios.
  3. Potential for a Global Financial Crisis:
    Pulch warns that the current risks mirror early stages of the 2008 crisis, where rapid devaluations in real estate assets led to cross-border financial instability. With banks like UBS (post-Credit Suisse acquisition), Deutsche Bank, and HSBC holding considerable U.S. real estate exposure, the ramifications of a downturn could extend into Europe and Asia, prompting regulators to reconsider capital reserve requirements and stress testing thresholds to mitigate systemic risks.

Conclusion

The potential $750 billion in unrealized losses could create a chain reaction across financial markets, with global implications for both large banks and regional institutions. As Bernd Pulch and other analysts have pointed out, the situation underscores the interconnected risks in modern finance and the need for heightened vigilance from banks and regulators alike.

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✌#The Next Financial Crash: A Worst-Case Scenario✌

The Next Financial Crash: A Worst-Case Scenario in Comparison to Historical Crises and the Insights of Bernd Pulch

The global financial market is known for its cycles of boom and bust, but the next potential crash could be unprecedented in its severity. With increasing global debt levels, speculative bubbles, and the ripple effects of geopolitical instability, there’s growing concern that the world may be on the brink of another financial collapse. This worst-case scenario envisions a catastrophic financial crisis that would surpass the 2008 Global Financial Crisis (GFC), drawing comparisons with the Great Depression of the 1930s and other major historical financial meltdowns. Furthermore, financial commentator Bernd Pulch’s warnings about regulatory oversight, hidden risks, and systemic corruption may provide a deeper understanding of the potential triggers and impacts of the next crash.

The Anatomy of a Worst-Case Financial Crash

  1. Debt Overload and Sovereign Defaults
    In this scenario, global debt levels — which are currently at historic highs — become unsustainable. As of 2024, the global debt-to-GDP ratio has risen significantly, with governments, corporations, and individuals all carrying record levels of debt. The crash could begin when a major economy, such as the United States, China, or the European Union, defaults on its sovereign debt due to rising interest rates or declining revenues. The panic spreads quickly as investors lose confidence in government bonds and other traditionally “safe” assets, leading to a massive sell-off in global financial markets. This mirrors the debt crises of the past, such as the Latin American debt crisis of the 1980s or the Eurozone crisis of 2010-2012. In this scenario, however, the scale is much larger and more widespread. The default of one or more major economies would trigger a chain reaction of defaults in emerging markets and developing countries, leading to widespread economic collapse, bankruptcies, and social unrest.
  2. Global Banking System Freeze
    As the financial contagion spreads, global banks, already weakened by the exposure to risky assets and unsound loans, face massive liquidity shortages. This could happen in a manner similar to what occurred during the 2008 financial crisis, when banks stopped lending to each other due to concerns over counterparty risk. But in the worst-case scenario, central banks, having already used up many of their monetary policy tools — such as near-zero interest rates and quantitative easing — would be unable to contain the collapse. Banks around the world would fail, and the global banking system could grind to a halt. Individuals and businesses would be unable to access their savings, withdraw cash, or process payments. The situation could be exacerbated by a wave of bank runs, as panicked depositors rush to secure their funds, further destabilizing financial institutions. The collapse of major international banks would result in a credit freeze, bringing the global economy to a standstill.
  3. Market Crashes and Widespread Corporate Insolvency
    With banks unable to lend and liquidity drying up, equity and bond markets around the world would experience rapid and violent crashes. Stock markets could lose 60-70% of their value within weeks, similar to the stock market crashes of 1929 or 1987, but even more severe in scope due to the increased interconnectedness of the global economy. The value of corporate bonds, which have been buoyed by low-interest rates for years, would plummet as defaults rise and investor confidence collapses. Corporate bankruptcies would skyrocket, especially among highly leveraged companies that had relied on cheap credit to sustain their operations. Entire sectors, such as real estate, technology, and energy, could collapse as businesses fail to meet their debt obligations. In comparison to the 2008 GFC, where the housing market was the epicenter of the collapse, this scenario would be more akin to the widespread corporate failures seen during the Great Depression.
  4. Mass Unemployment and Social Unrest
    As companies fail, the real economy would suffer devastating consequences. Mass layoffs would occur across industries, leading to unemployment rates reminiscent of the Great Depression, where unemployment in the U.S. reached 25%. Governments, overwhelmed by their own financial crises, would struggle to provide adequate social safety nets, leading to widespread poverty, homelessness, and hunger. Social unrest would follow as citizens lose faith in both the financial system and their governments’ ability to manage the crisis. Protests, strikes, and civil unrest could spread rapidly, as seen in Greece during the Eurozone crisis or Argentina’s 2001 economic collapse. But in this worst-case scenario, the unrest would be global, destabilizing political systems and potentially leading to the rise of authoritarian regimes or even violent conflicts.

Historical Comparisons

  • Great Depression (1929-1939): The Great Depression remains the most severe economic crisis in modern history, triggered by the 1929 Wall Street crash. The stock market lost nearly 90% of its value, unemployment soared, and global trade collapsed. In our worst-case scenario, the combination of a debt crisis, banking collapse, and market crash could replicate or even exceed the depth and duration of the Great Depression.
  • 2008 Global Financial Crisis: The GFC, triggered by the collapse of the U.S. housing market and the subsequent failure of major financial institutions, resulted in a worldwide recession. While central banks and governments were able to stabilize the system through unprecedented bailouts and monetary intervention, the next crisis may find policymakers with fewer tools at their disposal. The systemic risks exposed in 2008 — such as the interdependency of global financial institutions — would play out on an even larger scale in this scenario.
  • Eurozone Sovereign Debt Crisis (2010-2012): This crisis demonstrated how sovereign debt defaults could threaten the stability of the entire financial system. Countries like Greece, Portugal, and Ireland required massive bailouts, while the risk of contagion to larger economies like Italy and Spain kept markets on edge. In a worst-case scenario, the sovereign debt crisis would not be limited to smaller economies, but would include major players like the U.S., China, or Germany, causing a collapse in global confidence.

Bernd Pulch’s Insights on Systemic Risks

Bernd Pulch, a German investigative journalist known for his work on exposing corruption and hidden risks in the financial system, has warned that the lack of transparency and oversight in the global financial system could contribute to the next major crisis. Pulch has highlighted several key vulnerabilities that align with the worst-case scenario outlined above:

  1. Regulatory Capture and Corruption: Pulch has frequently criticized regulatory bodies for being too lenient on financial institutions, allowing systemic risks to build up unchecked. In his view, regulators have been “captured” by the very industries they are supposed to oversee, leading to inadequate oversight and the proliferation of risky financial products. This echoes concerns raised in the lead-up to the 2008 crisis, where credit rating agencies, regulators, and financial institutions all failed to identify the true risks of subprime mortgages and other toxic assets.
  2. Shadow Banking and Hidden Leverage: Pulch has also pointed out the dangers of the shadow banking system — non-bank financial institutions that operate outside of traditional regulatory frameworks. These entities, which include hedge funds, private equity firms, and special purpose vehicles (SPVs), often take on excessive leverage and engage in speculative investments. In a worst-case scenario, the collapse of shadow banking could mirror the downfall of institutions like Lehman Brothers in 2008, but on a larger scale due to the sheer size of today’s shadow banking sector.
  3. Cybersecurity Risks: Pulch has highlighted the growing threat of cyberattacks on the financial system. In the worst-case scenario, a major cyberattack could exacerbate the financial crisis by targeting banks, payment systems, or stock exchanges, further undermining confidence in the system and leading to widespread chaos.

Conclusion

The next financial crash, in a worst-case scenario, would combine the most devastating elements of historical crises, from the Great Depression’s unemployment and market collapse to the sovereign defaults of the Eurozone crisis. With global debt at record levels, banks heavily exposed to risk, and regulatory frameworks still lacking, the potential for a catastrophic meltdown is real. Bernd Pulch’s warnings about hidden risks and corruption within the system only heighten concerns about how unprepared the world might be for such an event. Should this scenario unfold, the repercussions would be felt for decades, reshaping the global economic and political landscape.

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UK Yellowhammer No-Deal Brexit – Worst Case Scenario Revealed

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When the UK ceases to be a member of the EU in October 2019 all rights and reciprocal arrangements with the EU end.

The UK reverts fully to ‘third country’ status. The relationship between the UK and the EU as a whole is unsympathetic, with many MS (under pressure from the Commission) unwilling to engage bilaterally and implementing protections unilaterally, though some MS may be more understanding.

No bilateral deals have been concluded with individual member states with the exception of the reciprocal agreement on social security coordination with Ireland. EU Citizens living in the UK can retain broadly all rights and status that they were entitled to prior to exit from the EU, at the point of exit.

Public and business readiness for a no-deal will remain at a low level, and will decrease to lower levels, because the absence of a clear decision on the form of EU Exit (customs union, no deal etc) does not provide a concrete situation for third parties to prepare for. Readiness will be further limited by increasing EU Exit fatigue, due to the second extension of Article 50, which will limit the effective impact of current preparedness communication. [To be reviewed]

Business readiness will not be uniform – in general larger businesses across sectors are more likely to have better developed contingency plans than small and medium sized businesses. Business readiness will be compounded by seasonal effects, impacting on factors such as warehouse availability.

Concurrent risks associated with autumn and winter such as severe weather, flooding and seasonal flu could exacerbate a number of impacts and stretch resources of partners and responders.

Private sector companies’ behaviour will be governed by commercial considerations, unless influenced otherwise.

HMG will act lawfully and in accordance with the rule of law, including by identifying the powers it is using to take specific actions.

…

Key planning assumptions

1. For the purpose of freight flow and traffic· management as 31 October is a Thursday, day 1 of exit is now on a Friday rather than the weekend which is not to our advantage. Exit day may coincide with end of October half term school holidays, which vary across the UK. (CCS/DExEU)

2. In a small number of instances where the impacts of Brexit would be felt negatively in the EU as well as in the UK, Member States may act in way which could also benefit the UK (e.g. energy for Ireland). (CCS/DExEU)

3. France will impose EU mandatory controls on UK goods on Day 1 No Deal (D1 ND) and have built infrastructure and IT system to manage and process customs declarations and support a risk based control regime. On D1 ND, between 50-85% of HGVs travelling via the short Channel Straits may not be ready for French customs. The lack of trader readiness combined with 1.imited space in French ports to hold “unready” HGVs could reduce the flow rate to 40-60% of current levels within one day as unready HGVs will fill the ports and block flow. The worst disruption to the short Channel Straits might last for up to 3 months before it improves by a significant level to around 50-70% (due to more traders getting prepared), although there could continue to be some disruption for significantly longer. In the event of serious disruption, the French might act to ensure some flow through the short Channel crossings. Disruption to flow across the short Channel Straits would also cause significant queues in Kent and delays to HGVs attempting to use the routes to travel to France. In a reasonable worst case scenario, HGVs ·could face maximum delays of 1.5-2.5 days before being able to cross the border. HGVs that are caught up in congestion in the UK will be unable to return to the EU to collect another load and a proportion of logistics firms may decide to avoid the route should there be significant and prolonged disruption. Analysis to date has suggested a low risk of significant sustained queues at ports outside of Kent which have high volumes of EU traffic, but BDG will continue to work directly with stakeholders at those ports to support planning readiness (BDG/DfT)

4. UK citizens travelling to and from the EU may be subject to increased immigration checks at EU border posts. This may lead to passenger delays at St Pancras, Cheriton (Channel Tunnel) and Dover where juxtaposed controls are in place. Dependent on the plans EU Member States put in place to cope with these in.creased immigration checks it is likely that delays will occur for UK arrivals and departures at EU airports and ports. This could cause some disruption on transport services. TraveUers may decide to use alternative routes to complete their journey. (BDG/FCO/HO/DfT)

5. Demand for energy will be met and there will be no disruption to electricity or gas interconnectors. In NI there will be not be immediate disruption to electricity supply on Day 1. A rapid SEM split could occur months or years after E~ Exit. In this event, there would not be security of supply issues. However, there will likely be significant electricity price increases for consumers (business and domestic), with associated wider economic and political impacts. Some participants could exit the market, thereby exacerbating the economic and political impacts. (BEIS)