More Stress Test Shenanigans
by ilene - October 24th, 2009 12:22 am
More Stress Test Shenanigans
Courtesy of Washington’s Blog
AFP reports:
The Federal Reserve will expand its so-called stress tests of the banking system to ensure they have enough capital during difficult periods, Fed chairman Ben Bernanke said Friday.
Bernanke highlighted the positive impact of stress tests conducted earlier this year on major banks, a move aimed at ensuring their financial health and building confidence.
"Building on the success of this initiative, we will conduct more frequent, broader, and more comprehensive horizontal examinations, evaluating both the overall risk profiles of institutions as well as specific risks and risk-management issues," Bernanke told a conference organized by the Boston Federal Reserve.
The highly publicized stress tests conducted earlier this year focused on 19 major banks, and indicated 10 needed additional capital.
Bernanke said the Fed would step up efforts to review bank capital requirements to avoid a recurrence of the credit crisis that has spread around the world.
"Additional steps are necessary to ensure that all banking organizations hold adequate capital," he said.
He noted that the Financial Stability Board — a global watchdog made up of senior representatives of national financial authorities — had called for "significantly stronger capital standards," and that the Group of 20 "has committed to develop rules to improve both the quantity and quality of bank capital."
"The Federal Reserve supports these initiatives. The structure of capital requirements should also be reviewed," Bernanke said.
Should we be reassured by the new round of stress tests?
Well, let’s take a look:
- Time Magazine called the previous stress tests a "confidence game" and Geithner a "con man" for running them deceptively
- Paul Krugman called the stress tests a mere "self-esteem class" for banks that no bank would be allowed to fail
- Nouriel Roubini said the stress tests "fail the basic criterion of a reality check"
- William K. Black called them "a complete sham"
- FDIC head Sheila Bair didn’t believe they were credible
- The stress tests were a P.R. stunt devised by the banks themselves
- The government has more or less admitted that the stress tests were meaningless (see this and this)
In addition, AFP quotes Bernanke as saying:
"For example, to reduce the tendency of current capital requirements to promote credit growth in booms and to restrict credit during downturns, the Federal Reserve has supported international efforts to develop capital standards that would be countercyclical," or require firms to build larger capital buffers in good times and allow them to be drawn down in times of stress.
But as I have previously noted:
One of the Fed’s…
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Hey, Look, The Stress Tests Really Weren’t Stressful Enough
by ilene - July 3rd, 2009 4:36 pm
Hey, Look, The Stress Tests Really Weren’t Stressful Enough
Courtesy of Henry Blodget at ClusterStock
Calculated Risk illustrates what we already knew: the bank stress tests weren’t nearly stressful enough.
The chart below looks at unemployment by quarter. The green bars are the "base case" in the stress tests (the most likely scenario, in the government’s opinion). The blue bars are the "adverse case" scenario–unlikely but possible. And the red bars are what’s actually happening (Q2 is a forecast).
The larger story here, unfortunately, is that the Obama administration continues to blow its credibility on the economy. By being too optimistic from the get-go, the administration is opening the door for critics and opponents who are already arguing that the Obama plan has failed.
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Calculated Risk has a bigger version of the chart and more thoughts here >
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
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