Not too much stress in the stress test
The Fed released the assumptions that served for the bank's stress tests. These tests are used to assess the robustness of the banks in view of the 2009-2010 adverse economic scenario. An impressive 150 highly-skilled (at least they are supposed to be) people participated. And guess what? The results show that we can sleep on both ears! Oef!
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.
But can we now be assured that everything is ok? Well, let's go further than the unsurprising press release and openthe 'research' document.
It is always interesting to read something that was carefully prepared by 150 people. All these people have been in the crisis, and are living with constant fear of falling banks, bailouts, derivative bombs etc. When speaking with them, I was always impressed by their gloom and pessimism, so I am curious about the scenario they used in the stress test:
You will be very surprised that the base case scenario seems more like a walk in the park, than a stress test. The drop of 2,1% of GDP in 2009 would be followed by 2.0% growth in 2010. That is not a stress test, it is the bullish case test.
Even the more adverse scenario is not really a horror scenario. -3,3% growth of GDP would be followed by 0,5% positive growth in 2010. If the Fed really believes these scenarios, it shouldn't be printing money like crazy, or talk about parallels with the Great Depression.
It is not avery credible report after the worst financial crisis in history. It feels like the Kremlin reports telling the Russian people after the explosion of Tsjernobyl that it is absolutely safe to grow crops in their garden.