Blog — 5 Jul, 2023
Insight Weekly: Banks bulk up capital cushions; economic growth cools; earnouts in PE exit deals
By Sarah Cottle
Today is Wednesday, July 05, 2023, and here’s your weekly selection of essential intelligence on financial markets and the global economy from S&P Global Market Intelligence. Subscribe to be notified of each new Insight Weekly.
In this edition of Insight Weekly, we put the spotlight on the Federal Reserve's annual bank stress test, which is designed to assess big banks' ability to keep lending during a severe recession. The stress test results this year showed smaller hypothetical losses compared with the year prior. In the aggregate, the banks' common equity Tier 1 ratio fell by a maximum of 2.3% in the simulated recession, compared with a decline of 2.7% in 2022. The aggregate loan loss rate was 6.4%, flat with 2022. This year's parameters incorporated large declines in residential and commercial real estate prices. The 23 large banks that participated in the stress test have built bigger capital cushions over existing requirements than the previous year — $231.54 billion in all, up from $220.90 billion, according to S&P Global Market Intelligence data.
Business activity across the four largest developed world economies — US, UK, Japan and eurozone — rose for a fifth month running in June, according to provisional "flash" Purchasing Managers' Index data compiled by S&P Global. However, the rate of growth slowed from May's 13-month high to register the weakest expansion of output since February. The recent growth surge seen in the spring has lost momentum, and almost petered out in the eurozone, as a deepening manufacturing downturn has been accompanied by slower growth in service sector activity. Encouragingly, inflation pressures have continued to abate, disappearing almost entirely in manufacturing and cooling in services.
Earnout payments were included in M&A deals totaling $26.86 billion globally between Jan. 1 and June 19. Private equity exits accounted for more than 22% of that total, their highest share since 2020, according to Market Intelligence data. The portion of total deal value contingent on future performance ranged from 5% to 78% among the 10 largest private equity exits to include earnouts over the last 12 months.
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Compiled by Roma Arora
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