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40 KBRA QUESTIONS FED'S 'HARSH' STRESS TEST VERBIAGE Recently, e Board of Governors of the Federal Reserve System (Fed) completed another iteration of the DFAST (Dodd-Frank Act Stress Test) and CCAR (Comprehensive Capital Analysis and Review) stress tests, the results of which indicate that the 33 participating U.S. bank holding companies would be able to incur $526 billion in losses while being under a potential adversative scenario, according to a report from Kroll Bond Rating Agency (KBRA). While the tests may have shown that the largest bank holding companies are capitalized enough to withstand the Fed's hypothetical severely adverse economic scenarios, KBRA believes investors should take note of the "harsh" verbiage contained in the results of the stress tests—and that liquidity rather than capital should be used to measure a bank's ability to stand up during an economic shock. e report states that total assets of this year's tested banking institutions contain over 80 percent of domestic banking assets. Despite the fact that these firms would still likely incur significant losses particularly under the potential scenario, these firms have increased common equity capital by over $700 billion since 2009. All participants passed the stress testing component of the Fed's examination. For 2016, the Fed did not incorporate significant changes to its modeling framework, though it implemented additional improvements to the supervisory capital calculation in order to increase accuracy. In the report, KBRA states that in their opinion, both the quantitative and qualitative facets of the testing procedure are becoming more rigorous year after year. KBRA also stated that they believe the exercise is comparatively harsh on a number of regional banks. Although regulators continue to implement additional enhancements to the stress testing model each round, the output, in KBRA's opinion, appears too onerous. e global market shock scenario continues to be a key component of CCAR for major U.S. banks. For example, if Citigroup or JPMorgan Chase had actual tremendous trading losses, market confidence would likely denigrate, resulting in liquidity and funding becoming key issues. According to previous reports done by KBRA, liquidity, not capital is, the key indication of a bank's ability to withstanding market stress, in their opinion. It is also their belief that a more dynamic global market shock stress test should be created to include key liquidity planning steps and contingent funding plans in the possibility of severe market related losses. Although the U.S. banks collectively passed without must difficulty this year, particular subsidiaries of foreign banks were listed as having serious qualitative issues. In KBRA's belief, the specific language from the Fed was particularly harsh. ey believe that verbiage such as "material unresolved supervisory issues that critically undermine its capital planning process," are harsher than necessary due to the fact that regulators usually do not make detailed public comments about institutions that still are open for business. is being said, KBRA shares that they feel investors should take note about the harshness of the Fed's public criticism for these institutions. BABY BOOMERS IN POSITION TO CONTROL MARKET'S DIRECTION Baby boomers and other homeowners over the age of 55, which number about 67 million, control about two-thirds of the nation's aggregate home equity, which computes to about $8 trillion. ese numbers put this group in a position to greatly influence where the housing market will go in the next decade, according to Freddie Mac Chief Economist Sean Becketti. "Whether they decide to move from their current homes or age in place, the cumulative impact of their decisions on mortgage demand, affordable housing supplies, and the housing options available to millennials and other aspiring homeowners will be substantial," Becketti wrote. Freddie Mac's survey of nearly 4,900 homeowners age 55 and over (a mix of men, women, Caucasian, African- American, and Hispanic, and Asian), revealed that the majority of baby boomers are satisfied with their current homes (about 64 percent) and that 90 percent believe people their age should own a home. Nearly everyone surveyed said homeownership makes sense for married people with children (96 percent), and a majority said it makes sense for people without children (85 percent). About 63 percent of respondents said they prefer to age in place, which would compute to about 42 million homeowners spread out across the entire 55+ demographic. However, that still leaves approximately 40 percent of boomers (27 million) who said that if they had complete control, they would move at least one more time. According to Freddie Mac, 19 million of those boomers plan to buy a home and eight million plan to move in the next four years. "ese are big numbers with the potential to tighten home buying competition in the housing market, especially for millennials and other first-time homebuyers," Becketti wrote. "ey also have the potential to generate significant new demand for mortgage credit. Whether the borrower is financing age-in-place renovations or buying a new house, even a relatively modest increase in lending to 55+ homeowners could add trillions of dollars in new originations in a relatively short time. One way or another, the baby boomers' housing decisions over the next few years will take our market to brand new places." "These are big numbers with the potential to tighten home buying competition in the housing market, especially for millennials and other first- time homebuyers."

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