The proposed"Mar-a-Lago Accord"—a radical plan by Trump's economic team to weaken the U.S. dollar—could trigger significant financial instability.
At the core of the proposal is the belief that the U.S. dollar is overvalued, making American exports expensive and undermining domestic industries. The Trump team’s solution? Persuade—or pressure—other nations to restructure their holdings of U.S. debt, thereby devaluing the dollar.
This approach mirrors the 1985 Plaza Accord, where the U.S., Japan, West Germany, France, and Britain agreed to jointly depreciate the dollar. However, today’s economic landscape is vastly different, raising doubts about the plan’s feasibility.
How It Would Work: Carrots and Sticks
The Mar-a-Lago Accord would classify countries into three categories:
- Green (Friendly): Nations that cooperate would receive benefits like military protection and tariff relief.
- Yellow (Neutral): Countries on the fence could face economic scrutiny.
- Red (Unfriendly): Resistant nations would confront higher tariffs and reduced U.S. military support.
This tiered system aims to strong-arm allies and rivals alike into compliance. But critics argue it could backfire, pushing nations like China closer to alternative financial systems.
For banks, a sudden dollar devaluation would impactliquidity, credit risk, and capital adequacy, particularly for those with large USD-denominated exposures. To mitigate these risks, banks must leverage stress testing—a critical tool under Basel III frameworks—to assess vulnerabilities and reinforce defenses.
How Banks Can Use BBA's Stress Testing to Prepare
1. Currency Risk Assessment
Threat: A weaker dollar would immediately affect banks with:
- Foreign currency assets (loans, bonds)
- USD liabilities (deposits, wholesale funding)
- Off-balance-sheet exposures (forex derivatives, guarantees)
BBA Stress Testing Actions:
- Scenario Design: Model dollar depreciation shocks (e.g., 15%, 25%, 35%) over 1–3 years.
- Net Open Position Analysis: Identify mismatches between USD assets/liabilities.
- Hedging Strategies: Adjust forex hedges (e.g., increase forward contracts for at-risk currencies).
2. Liquidity Stress Testing
Threat: Dollar devaluation could lead to:
- Foreign investors fleeing USD assets, tightening dollar liquidity.
- Depositor flight to stronger currencies (e.g., EUR, gold).
BBA Stress Testing Actions:
- Cash Flow Analysis: Test ability to meet USD obligations under "run-on-the-bank" scenarios.
- Contingency Funding Plans (CFP): Secure backup lines in alternative currencies (e.g., EUR swaps).
- High-Quality Liquid Assets (HQLA): Ensure sufficient USD and non-USD HQLA to cover 30-day outflows.
3. Credit Risk Reassessment
Threat: Sector-specific impacts:
- Exporters (winners): Better repayment capacity.
- Importers (losers): Higher costs may trigger defaults.
- Sovereign Risk: Emerging markets with USD debt could face crises.
BBA Stress Testing Actions:
- Portfolio Segmentation: Re-rate loans to exporters/importers under dollar shock scenarios.
- Provisions & Capital Buffers: Increase provisions for vulnerable sectors (e.g., energy importers).
- Sovereign Exposure Review: Stress test sovereign bond holdings in "Red Zone" countries.
4. Interest Rate Risk (IRRBB)
Threat:A weaker dollar may force the Fed to hike rates, impacting:
- Fixed-rate loan books (losses on mark-to-market valuations).
- Deposit betas (funding cost volatility).
BBA Stress Testing Actions:
- Earnings-at-Risk (EaR) Modeling: Project NII impacts under rate hikes.
- Duration Gap Analysis: Shorten asset durations or hedge with interest rate swaps.
5. Contagion Risk Modeling
Threat: Spillover effects from:
- China's response (yuan devaluation, capital controls).
- Commodity price swings (USD-denominated oil, metals).
BBA Stress Testing Actions:
- Global Shock Propagation: Model second-round effects (e.g., Asian currency crises).
- Counterparty Risk: Stress test derivatives exposures to "Red Zone" nations.
Strategic Recommendations for Banks
1. Pre-emptive Hedging:
- Increase forex options for tail-risk protection.
- Diversify reserves into non-USD assets (gold, EUR, JPY).
2. Regulatory Preparedness:
- Align stress tests with Basel III's IRRBB and liquidity rules.
- Preemptively boost capital buffers to cover potential losses.
3. Geopolitical Monitoring:
- Track "Green/Yellow/Red" country classifications for early risk detection.
- Develop country-specific contingency plans.
Conclusion: Stress Testing as a Shield
The Mar-a-Lago Accord represents a high-stakes gamble with unpredictable outcomes. Banks must stress test now to avoid being caught off guard by the coming storm. Banks that leverage stress testing to:
✔ Quantify currency mismatches
✔ Fortify liquidity buffers
✔ Reassess credit risk exposures
...will be best positioned to navigate the turbulence ahead.
Final Warning:
"In currency wars, the unprepared become collateral damage. Proactive stress testing isn’t just compliance—it’s survival."