Courtesy of Mish.
In another round of "stress" tests last month, the Fed said Big Banks Pass Muster.
Anyone who has been following stress tests in US or Europe knows full well, the tests were in reality "stress free".
Confirmation of the undercapitalized state of US banks comes from former Fed Governor Thomas Hoenig. He served as chief executive of the Tenth District Federal Reserve Bank, in Kansas City, for 20 years. Rules limit terms to 20 years. Hoenig is now vice chairman of the Federal Deposit Insurance Corporation.
Undercapitalized, Unsafe, and Unsound
Hoenig's opinion should carry some weight. And a New York Times Editorial citing Hoenig sounded an alarm today regarding Unsafe and Unsound Banks.
After the latest round of bank stress tests last month, the Federal Reserve announced that, by and large, the nation’s biggest banks would all be able to withstand another crisis without requiring bailouts.
This month, Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation, released data that contradict the Fed’s conclusions.
In the face of Mr. Hoenig’s challenge, the Fed would do well to recall a chapter from its recent history. Before the financial crisis, when Alan Greenspan, then chairman of the Fed, was insisting all was well with the banks, one Fed governor, the late Edward Gramlich, warned of mounting risks. He was ignored.
At issue this time around is the level of bank capital, which reflects the amount of loss a bank can endure before failing (or, if the bank is “too big to fail,” requiring a bailout). According to the Fed’s main measure, capital at the eight largest American banks averaged 12.9 percent of assets at the end of 2014, well above required regulatory minimums.
In contrast, Mr. Hoenig’s calculations show that capital at those same banks averaged only 4.97 percent at the end of 2014.
In a recent speech, Mr. Hoenig noted that under American accounting rules, derivative holdings add $300 billion to the balance sheets of five top banks — JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley. Under international rules, the holdings would add $4 trillion.
History favors Mr. Hoenig’s approach. Gains and losses on derivatives may be offsetting when the economy is stable, but in the financial crisis American taxpayers were forced to hand the banks tens of billions of dollars to make good on derivative bets gone bad. In a healthy system, the banks would hold enough capital to ensure that doesn’t happen again. Do they now? Fed officials seem to think so. They should think again.
Thomas Hoenig on State of US Banks…
