Macro micro linkages

Selected organization: FINANCIAL INSTITUTION (BANK )

Assume you are working at the bank as an economist and you need to provide some recommendations to C-Suite decision-makers on what to do for stagflation.

Please address how stagflation impacts the bank from a Demand and Supply Perspective

Prepare for a worst case macro environment scenario over the next 2-3 years:

1 - Stagflation-What would it mean for the bank?

2 - What could/should we do?

MACRO TO MICRO CHANNEL

Describe the macro level impacts of stagflation and connect the dots to bank performance generally. The purpose is to create the pretext to the bank specifically, which is then examined in the following elements.

DEMAND CHANNEL

Mechanism 1 Theme: Each 1% weakening in demand for bank credit poses a risk of $X to income and $Y to Balance Sheet. The banks current position to head this risk is (good? Bad? Ugly?) so that mitigating actions of A, B, C, and D are recommended.

CREDIT / FINANCE CHANNEL

Mechanism 2 Theme: Each 1% rise in credit losses poses a risk of $X to income and $Y to Balance Sheet. The banks current position to head this risk is (good? Bad? Ugly?) so that mitigating actions of E, F, G and H are recommended.

Mechanism 3 Theme: A 1% rise in risk-weighted assets would require a $Y increase in capital to meet regulatory requirements, with implications I, J, and K. The banks current position to head this risk is good? Bad? Ugly?) so that mitigating actions of E, F, G and H are recommended.

F/X CHANNEL

In a stagflation scenario, there is are sub-scenarios A, B, C, D (more than 1?) with respect to FX, with each 1% decline in the Canadian dollar exposing us to $X on income statement and Y on balance sheet. The banks current position to head this risk is good? Bad? Ugly?) so that mitigating actions of E, F, G and H are recommended.

SUPPLY CHANNEL

Remains to be seen what the impact is. Presumably inflation drives wages up, but maybe the banks demand for workers is down. These two forces work against each other, so what do we believe will happen?

Where macro impacts play out for firms Impact Channels Impact Locations (How) (Where) F IX Channel Supply Non-Market Channel Channel Credit / Finance Channel