There are two sides to a coin. The same goes with current financial risks and their solutions.

Four score and seven weeks ago, the U.S. Fed brought forth on the continent a new motion: maintain a restrictive Fed Funds Rate, conceived in Unanimity, and dedicated to the proposition that all will be burdened (un)equally. 

Fast forward 87 weeks, and the Federal Reserve’s yearly Dodd-Frank Stress Test and the Comprehensive Capital Analysis and Review (CCAR) have come and gone in the blink of an eye. While all 22 of America’s largest banks successfully passed the test, it is rather apparent that such a moment of triumphant was brought about by a more lenient set of regulatory requirements. 

With the stock market’s eclectic behavior in recent months, brought on by this administration's gung-ho tariff agenda and Trump's freshly passed Big Beautiful Bill,  the economic forecast is sullied. So, why are we turning a blind eye to risk?

Primarily, a lack of currency employed by the Dodd-Frank yearly Stress Test is materially evident.

The 2025 test included measuring against an identical unemployment figure of 10%, which became the benchmark measurement after unemployment peaked in October 2009, following the GFC. Currently, as of June 2025, unemployment sits at 4.10%.

Furthermore, according to the Federal Reserve, this year’s test included a decline in commercial real estate (CRE) of only 30% (not 40% like in 2024), a ""commensurate" decline in economic output" (Federal Reserve, 2025), and a fall in house prices of 33 percent. Actual GFC records had office CRE (Fitch Ratings, 2024) fall by 47% and house prices also fall, by 33% (Washington Post, 2018).

The aforementioned benchmarks were recorded during a period which saw the S&P 500 hit a historic peak of 1,565 points in 2007 (Reuters, 2013). Seventeen years on, the S&P 500 sits at a bloated 6,270 points, a 301% increase. Additionally, the cumulative deficit in the United States is projected to grow to $1.9 trillion in FY2025 (6.2% of GDP) (Bipartisan Policy Center, 2025), an approximate 1,080% increase compared with the 2007 fiscal year. The Stress Test’s figures are clearly disproportionate to accumulating risks. 

For a nation that put a man on the moon, such astronomical feats of stock market growth are undeniably admirable. However, just like the first lunar touchdown, the risk of enduring a hard landing remains a possibility. For example, due to the current inflationary environment, 44% of Americans in full-time employment do not earn enough to cover basic needs (Fortune, 2024). If an economic hard landing does eventuate, the US may resort to a tried-and-tested taxpayer bailout, a financial instrument from their GFC-era toolkit. However, should we find ourselves in the same position, could we circumnavigate a taxpayer bailout?

Paolo Zannoni, Executive Chairman of Prada and an advisor to Goldman Sachs suggested in an article that a “[taxpayer] bailout is a necessary outcome.” However, there is opposition to such sentiments. A Politico piece argued that a taxpayer bailout would “undermine market discipline and reviv[e] the cycle of privatizing gains and socializing losses.” The authors charge that the onus should be placed instead upon the Financial Stability Oversight Council (FSOC) to send a clear message that the financial cost of failure will be borne by “private investors and creditors, not taxpayers.”

This viewpoint is not new. During the Obama Administration, President Barack Obama stated that “there will be no more tax-funded bailouts. Period” (New York Times, 2023). In March of 2023, President Joe Biden echoed a similar message with “no losses will be borne by the taxpayers” in response to the collapse of Silicon Valley Bank. However, regulators and Congress bailed out investors and creditors when Covid-19 struck, and again, when Silicon Valley Bank failed (Calabria et al., 2024).

A financial solution is needed. Something that could alleviate the impact of an economic downturn without resorting to the taxpayer bailout option. Such a solution may come in the form of an Equity-backed Security (EBS), or Equity Bond. 

The purpose of an EBS is to reduce the monthly mortgage repayments for a financially struggling homeowner or commercial property owner, in exchange for an equity share of their real estate asset. This product “could contribute to a reflection on new approaches” to “help address the mortgage cost burden” (OECD WISE, 2024*). 

Developed in response to rising interest rates, a predicted recession, and possible mortgage defaults, an EBS has been designed in such a way to simultaneously protect the taxpayer, home and business owners, lenders, and financial institutions.

Conceptually, an EBS product would act as a mass market Home Equity Conversion Mortgage (HECM), the point of difference being that an EBS would be accessible to people under the age of 62 who have outstanding property or business loan debt.

An EBS product would be serviceable in the Financial Services Sector, providing economic benefit to the likes of residential and commercial property borrowers and lenders, along with firms that cater to mergers and acquisitions (M&A), and investment management. With an Executive Manager of HSBC UK commenting that such a product may have “merit” in the UK market, there is interest in entertaining a new way forward.

Let us assume the perspective of a heavily indebted homeowner, Mr Citizen. After struggling for the last few years due to relentless interest rate rises and inflationary pressures, Mr Citizen finds himself living beyond his means. His neighbors Mr & Mrs Taxpayer, and close relative Auntie Fund have been helping him remain financially afloat.

The bane of Mr Citizen’s existence is his current monthly repayments which are approximately $3,289, including $2,001 of interest. In contrast, under a new EBS arrangement, Mr Citizen would only pay the interest component and a discretionarily elected portion of the principal, therefore the outstanding monthly principal is forgiven. For example, Mr Citizen's new monthly repayments would come to $2,323; a 29.37% discount as he has agreed to pay a quarter of his principal ($322).

In exchange for this reduction in the value of repayments – or rather, a release of extra personal income for other purposes – Mr Citizen has agreed to an annual release of equity value (REV) of 2.398%**, compounding for 7 years, accumulating to 16.79% at the date of maturity. 

The percentage rate of released equity listed above has been derived from utilizing a combination of both the original and remaining duration of said loan in months. This figure is then multiplied by a factor of 3.33: this is representative of a single year in a typical 30-year loan.

The formula could be adapted to accommodate variables within domestic economies. For example, with the current risks pertaining to commercial properties, adjustments may be required to account for the instability of the borrower in question. This is especially pertinent considering that we are a significant way through a 24-month,  $1.2 trillion-dollar CRE debt maturing cycle ending in late 2025 (Cred iQ, 2023).

For M&As, while the same principle ideas remain at play, it is the framing of stabilizing risk here that is the distinction. Instead of continually entertaining the possibility of bankruptcies, an EBS offers the systematic and gradual restructuring of fallible SIFI giants.

By relegating these “too big to fail” SIFIs back into the fray of the free market, the government, with its acquired oversight and utilitarian interests, could cultivate and encourage strategic competition between all market participants, enabling innovative solutions to materialize naturally.

Furthermore, by having the government act as a market participant, any dividends or profits earned through such agreements could flow into public infrastructure investments to generate further revenue, or into a public coffer to aid in government-based initiatives and programs, such as Social Security or Veterans Benefits. It is time to impel the government of the people, by the people, for the people, to put our pennies where their mouths are.

* This statement does not represent the official views of the OECD nor is it an endorsement by the OECD.

** For an institution, this REV amount would constitute the equivalent monetary value of preference shares (and or equity shares) which offer voting rights and order of payment prioritization, thus enabling more leverage to be exercised in case of, for example, a default. Institutional RE would be held in perpetuity.