What Will We Learn From The Bank Stress Tests?

Stress Test

Stress Test

I haven’t written anything about this and I don’t intend to waste a lot of pixels doing so but let me quickly give you my opinion of the forthcoming bank “stress tests”. Nothing more than propaganda.

Here is an excerpt from a New York Times article this evening on the tests.

On Friday, Treasury and Fed officials put out the message that the stress tests themselves should not be seen as cause for anxiety. The tests, officials said, would simply make clearer whether a particular bank needs more capital now or might need more in the future if conditions become worse.

Their implication was that federal regulators were not about to impose strict numerical rules to decide whether a bank had “passed” or “failed” the stress test. Federal officials are not expected to publicly disclose the findings about any specific bank, though they are expected to provide at least a rough idea of the new questions they are asking.

Some officials argued that the tests might actually provide reassurance about the strength of many banks. Indeed, Treasury and Fed officials said they had consulted with industry executives in devising the tests.

So the tests are no cause for anxiety even though they make it clearer who may or may not be able to survive more severe economic stress. But, of course, they can’t cause anxiety because they aren’t going to tell anyone which banks are at risk. Moreover, should anything leak out (never happens, right?) there is plausible deniability because we won’t be privileged to know the metrics of the stress test. And the tests might reassure us although it isn’t clear why they would since they aren’t going to tell us the results. Say what? If that doesn’t make you feel more comfortable then the fact that the banking industry helped figure out the tests should make you sleep well.

Do you feel like you’re caught in the middle of some Kafkaesque novel?

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