Courtesy of Pam Martens.
The Federal Reserve Building in Washington, D.C.
Talk about bad timing. Tomorrow, while the Brexit vote takes place in the U.K. and is guaranteed to whipsaw markets through the Friday morning open when the results of the vote are expected, the Federal Reserve plans to add to market jitters on Thursday by announcing the results of its stress tests on the biggest banks — while withholding the final leg of the results until the following Wednesday.
The stress tests are an annual Fed exercise which are meant to reassure the public and Congress that the mega banks are holding adequate capital for even an extreme economic downturn; in other words, that another epic taxpayer bailout of insolvent banks won’t sneak up on the Fed like it did in 2008.
Unfortunately, according to the Federal agency established under the Dodd-Frank financial reform legislation to provide ongoing research on potential systemic risks within the U.S. financial system, the Office of Financial Research (OFR), the Fed’s annual stress tests fail to measure the biggest problem in the current U.S. financial structure – the unprecedented concentration of counterparty risk.
The OFR researchers, Jill Cetina, Mark Paddrik, and Sriram Rajan, say the problem is not what would happen if the largest derivatives counterparty to a specific bank failed, as the stress tests currently measure, but what would happen if that counterparty happened to be the counterparty to other systemically important Wall Street banks.
By focusing on “bank-level solvency” instead of the system as a whole, the Fed may be ignoring the real problem of systemic risks in the system according to the report. The researchers write…
…
