Stressed Out: A Bond Market Risk Ranking Of Leading Financial Institutions

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 March 13, 2014 with the bond market assessments of financial institutions whose bonds were traded in the U.S. corporate bond market on Friday, January 23.  We use 1,281 trades on the bonds of 51 different legal entities in the financial services industry with underlying principal of $1.4 billion to rank those firms by riskiness.  We rank the institutions by credit spread and by spread to the U.S. Dollar Cost of Funds Index.

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