Bond Market Stress Test: 25 Financial Institutions Have Lower Credit Spreads than the Best “Too Big to Fail” Bank

The Federal Reserve will announce the results of the “DFAST” stress tests on March 5. On March 13, 2014, we pointed out the many reasons why the Federal Reserve-mandated stress testing process will be a less accurate measure of financial institutions’ risk than the market’s price on those institutions’ promise to pay a dollar in the future. The market place considers all scenarios, not just three as in the Fed’s CCAR stress tests. The market place invests cold hard cash to price various financial institutions’ promises to pay.

In the stress testing process, those who prepare the stress tests are often in a conflict of interest position, since it normally serves them best financially if the CCAR results are prepared on the sunny side of the street. In this note, we update our results from January 27, 2015 with the bond market assessments of financial services firms whose bonds were traded in the U.S. corporate bond market on Monday, March 2. Many of the firms whose bonds are traded are not subject to the stress testing process, so a bond market analysis gives us a broader and more comprehensive risk assessment. We use 5,383 trades on the bonds of 127 different legal entities in the financial services industry with underlying principal of $1.8 billion to rank those firms by riskiness. We rank the institutions by credit spread, by spread to the U.S. Dollar Cost of Funds Index, and by “best value,” which we define as the ratio of credit spread to matched maturity default probability.

Conclusion:  25 financial institutions led by Berkshire Hathaway Finance Corporation (BRK.A) (BRK.B) have a better spread to the U.S. Dollar Cost of Funds Index TM than the best of the four “too big to fail” financial institutions in the United States, which we define as the grouping including Bank of America Corporation (BAC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC).

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About AIWMI

The Association of International Wealth Management of India (AIWMI) is a not-for-profit organization and a globally recognized membership association for finance professionals. AIWMI primarily focuses on the broad and strategic role of developing a more robust and forward-looking training infrastructure for the financial services sector and to promote more active industry involvement and collaboration in training and continuing education. AIWMI is offering advanced international certification programs along with a wide variety of high-quality executive education programs. AIWMI programs combine state-of-the-art knowledge and skills with practical experience and insights into the functioning of the financial sector. All AIWMI courses and educational events have an intense and pragmatic curriculum. Participants are exposed to the latest developments within the financial services sector. AIWMI plays a key role in guiding the development of the financial services sector. AIWMI works with key industry participants’ viz. the Government, the Regulators, the Industries/Associations, the Corporate, the Media and the General Public to achieve its objectives. Besides enhancing technical competence and professionalism in the industry, AIWMI organizes events and facilitates discussions to promote best practices in leadership and talent development in the financial sector with an aim to become Asia’s premier center of excellence for financial education.

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