Opinion: Current 'state-of-the-art' macroeconomic forecasting is stuck in 1990 econometric models that are highly inaccurate.
Traditional financial institutions take deposits from customers and use them to make loans. But they loan out much more than what they have in store at a given point in time — a concept known as fractional banking. On one hand, the difference between the interest on the loans and the interest paid to depositors is referred to as the net interest margin and determines a bank’s profitability.
The problem is that recent actions by the United States federal reserve reduced the value of long-term debt, to which SVB was heavily exposed through its mortgage-backed securities . When SVB flagged to its shareholders in December that it had $15 billion in unrealized losses, wiping out the bank’s equity cushion, it prompted many questions.On March 8, SVB announced it had sold $21 billion in liquid assets at a loss and stated that it would raise money to offset the loss.
And that’s exactly what happened: The proportion of STEM workers grew by 30% between 2011 and 2017 in financial services, and much of this was attributed to the increase in regulation. However, small and mid-sized banks have had a more challenging time coping with these regulations — at least in part due to the cost of hiring and building out sophisticated dynamic models to forecast macroeconomic conditions and balance sheets.
We need to move away from forecasting as a “check-the-box” regulatory compliance measure toward a strategic decision-making tool that is taken seriously. If the nowcasts do not perform reliably, either stop producing them or figure out a way to make them useful.
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