When Wall Street doesn't know where the world economy is heading, it books a session at Mark Zandi's "impairment studio".
Faced with a pandemic-fueled recession with few historical comparisons and a new accounting rule requiring lenders to total up expected losses even before borrowers default, scores of U.S. banks are relying on forecasts from Zandi, the chief economist of Moody's Analytics, to help with their calculations.
The exercise is critical to billions of dollars in quarterly earnings and one that, depending on the actions of regulators, could hit capital levels enough to choke a recovery.
"It feels like we're in the center of the universe," Zandi, 61, told Reuters. "But, at the moment, the economy is at the center of everything."
Even Zandi, who has been in economic forecasting for 30 years and has made countless appearances before Congress as an expert witness, says he was thrown by the coronavirus crisis.
He scrambled to update forecasts for the U.S. economy as countries around the world went into lockdown.
"March was an incredibly difficult month," said the economist, who is widely quoted in the U.S. media and a familiar face on business channel CNBC.
Moody's Analytics, a unit of Moody’s Corp, says some 170 institutions around the globe get forecasts from Zandi and his team through a product called "ImpairmentStudio," a platform that helps clients calculate what their loan losses might be based on a range of different economic forecasts.
At least 59 U.S. lenders, including Truist Financial Corp, , the country's eighth biggest by assets, and smaller lenders have said they used Moody's scenarios, Keefe, Bruyette & Woods research shows.
While bigger lenders have stayed mum about Moody's, a bank economist who declined to be named said they check their numbers against Zandi's forecasts.
The chief financial officer of a regional bank, who asked not to be named, added: "We get the benefit of our analysts knowing what we are doing because we are in the pack using Moody's.
"The product is pretty good and it is as close to a standard as exists."
Zandi's reputation as an independent-minded economist also helps. He has testified before congress more times than he can remember and, despite working on a presidential bid by the late Republican John McCain, was considered by President Obama as a contender to run the Federal Housing Finance Agency in 2013.
"He's not out there cheerleading and he's not doing gloom," said a second banker, who declined to be named.
The pandemic struck just as the new accounting standard kicked in. The old one allowed lenders to wait to write-down values until losses were clear. That delay had led to doubts about banks' strength during the last financial crisis.
Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co and Wells Fargo & Co increased their reserves for loan losses by $16 billion in the first quarter, pulverizing profits.
During earnings calls, analysts pressed for details on which economic forecasts banks had used.
For those that acknowledged using Moody's, the analysts wanted to know, for example, if they had closed their books using Zandi’s March 27 updated baseline forecast that showed second-quarter U.S. gross domestic product falling at an annual rate of 18%. And, had they made adjustments or blended in any of Moody's more pessimistic or optimistic scenarios?
Answers were vague.
Since then, Zandi’s mid-April forecast showed the second-quarter rate of GDP at -30% and mid-May at -33%.
Analysts will be watching for the mid-June forecast for possible indications of additional loss expenses in the second quarter, said Brian Kleinhanzl of KBW.
The new accounting rule says banks must use "reasonable and supportable" forecasts, but there is a lot of flexibility on what scenarios they adopt and the choice can be material.
A Moody’s study in April applied one of its more optimistic scenarios to a sample of commercial real estate loans and found expected credit losses would be 25% less than its base case scenario. A more pessimistic scenario resulted in 290% greater losses.
"Given the high amount of uncertainty in the economy, it turns out you can come up with multiple scenarios and they are all reasonable and supportable," Kleinhanzl said.