Wall Street banks are planning for a sustained period of higher inflation, running internal health checks, monitoring whether clients in exposed sectors could pay back loans, devising hedging strategies and counseling caution when it comes to deals.
U.S. consumer prices this month posted their biggest annual gain in 31 years, driven by surges in the cost of gasoline and other goods.
A sustained period of higher inflation would pose both credit and market risk to banks, and they are assessing that risk in internal stress tests, said one senior banker at a European bank with large U.S. operations. "It's still a very beneficial environment to be in if you need funding, but that won't last forever."
Sales and trading teams, meanwhile, are taking more calls from clients looking to reposition portfolios, which are vulnerable to a loss in value. When inflation ran out of control in the 1970s, U.S. stock indices were hit hard.
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