alt Hacker NewsWhat's odd is according to the article, this index estimated an ~8% default rate in 2024. So maybe the stress test was measuring something different? It's weird to think the stress test would find a lower loss rate during a severe recession than in the most recent year with data available.
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> maybe the stress test was measuring something different?
The Fed is measuring the loss on bank loans to the private-credit lenders. A 10% portfolio loss shouldn't result in those lenders defaulting to their banks.
By my rough estimate, one can halve the portfolio loss rate to get the NBFI-to-bank loss rate. So a 10% portfolio loss means we're around a 5% expected long-run loss to the banks. Which is still weirdly high, so I feel like I must be missing something...
The regulators were modeling a scenario where private credit was dragged down by a problem elsewhere in the economy, not one where the rest of the economy was dragged down by private credit. Everyone understands that center of a financial implosion is always worse than its effects on the broader economy, but regulators aren't tasked with stopping the explosion at ground zero, they are tasked with stopping contagion dominoes from falling, so that's what they model.