The U.S. Treasury has published the results of the so called “stress test” of the 19 major banks. Surprise, surprise the picture is all positive. See the list at the Washington Post and at Zero Hedge.
So the banks are save, what now? Well, contrary to what they want to make us believe, banks maz not be as save as they now appear to be. The results of these so-called stress tests are unreliable for several reasons.
The stress tests were not thorough and relied mainly on the banks view of their own assets quality. As mentioned in the Feds press release
More than 150 examiners, supervisors and economists from the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation participated in this supervisory process. Starting from two economic scenarios–a consensus estimate of private-sector forecasters and an economic situation more severe than is generally anticipated–they developed a range of loss estimates and conducted an in-depth review of the banks’ lending portfolios, investment portfolios and trading-related exposures, and revenue opportunities. In doing so, they examined bank data and loss projections, compared loss projections across firms, and developed independent benchmarks against which to evaluate the banks’ estimates. From this analysis, supervisors determined the capital buffer needed to ensure that the firms would remain appropriately capitalized at the end of 2010 if the economy proves weaker than expected.
What the Fed is telling us here is that it has “more than” 150 – probably 151, or do they not even know how many people worked on this? – examiners, supervisors etc worked on it. This is not many considering that they had to stress test the 19 largest banks. Thankfully, they could rely on the banks data and just rubber stamp the results the banks required. As pointed out by Barry Ritholz
the Consensus estimates, professional forecasters and blue chip surveys have all been awful — terribly wrong — during this entire fiasco.
Why then should anyone assume that they are right this time?
That the results were not scientific but negotiated is fully clear from an article in the Washington Post writes
The banks were intent on sending a message that they were strong enough to weather the economic storm and didn’t need additional capital infusions from the government that could all but nationalize their franchises.
I fail to see the value of a test in which you can not only define the contents of the tests, the weight of the questions being answered and negotiate the result.
Paul Krugman in his New York Times op-ed of today writes that
As a result, the odds are that the financial system won’t function normally until the crucial players get much stronger financially than they are now. Yet the Obama administration has decided not to do anything dramatic to recapitalize the banks.
I am wondering, if the taxpayer will be liable if the banks tank again. After all, the government has given an investment advice. If someone follows that, loses money and it turns out the government whitewashed the banks, this could be expensive.