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The "Mar-a-Lago Accord" and BankingBook Analytics: Stress Testing Strategies for USD Devaluation Risk

ARTICLE| Tue Apr 01 2025

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:

  1. Green (Friendly): Nations that cooperate would receive benefits like military protection and tariff relief.
  2. Yellow (Neutral): Countries on the fence could face economic scrutiny.
  3. 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:

BBA Stress Testing Actions:

2. Liquidity Stress Testing

Threat: Dollar devaluation could lead to:

BBA Stress Testing Actions:

3. Credit Risk Reassessment

Threat: Sector-specific impacts:

BBA Stress Testing Actions:

4. Interest Rate Risk (IRRBB)

Threat:A weaker dollar may force the Fed to hike rates, impacting:

BBA Stress Testing Actions:

5. Contagion Risk Modeling

Threat: Spillover effects from:

BBA Stress Testing Actions:

Strategic Recommendations for Banks

1. Pre-emptive Hedging:

2. Regulatory Preparedness:

3. Geopolitical Monitoring:

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."