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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.
5 Comments
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Frank
On 24 Apr, 2009
This is not a stress test and these are 150 people who are not highly skilled! :
1. Timothy Geithner said "the vast majority" of banks could be considered well-capitalized. First of all Mr Geithner has been wrong for almost a decade. Why should he be right now. Second; it does'nt matter if the vast majority of banks is solvent when the 5 biggest of them are insolvent. Size matters Mr Geithner!
2. The adverse scenario assumes an unemployment rate of 10.3% at the end of 2010. My God; the unemployment rate will exceed 10.3% before the ned of 2009! The adverse scenario is a joke!
3. Banks have been lying about their financial statement, tier3 capital, exposure to toxic debt, ... for more than 2 years. Who is naive enough to believe them now?
The FED, Treasury and Obama are going to prentend the US financial system is OK, that the economy is improving, that the situation is stabilizing. The people who failed their way to the top, who layed the groundwork for this crisis, who never saw it coming, who underestimated it's severeness when it first appeared are now telling us everything is OK. That really makes me feel confident ... -
koen2
On 24 Apr, 2009
@Geert: thanks
I don't know if you read this analysis already from William Black, a former senior bank regulator and now prof. of economics:
http://www.nakedcapitalism.com/2009/02/william-black-there-are-no-real-stress.html
The concept that there are 100 examiners with these skills, suddenly freed up from all other duties, assigned to CONDUCT stress tests is a lie.
...
Yves here. Black is not using the fraud word lightly. He believe that we have Enron-level accounting fraud happening, now, in the financial services industry.
it's all smoke and mirrors, this is what's really going on (Dean Baker):
http://georgewashington2.blogspot.com/2009/02/leading-economist-says-true-purpose-of.html
Mr. Geithner wants to use taxpayer dollars to keep bankrupt banks in business. In effect, he wants to tax teachers, fire fighters, and Joe the Plumber to protect the wealth of the banks' shareholders and to pay high salaries to their top executives.
confer Simon Johnsons 'the quiet coup' and Desmond Lachman, another former IMF man, independently from him in "Welcome to America, the World's Scariest Emerging Market": the banks are running the show in the 'emerging market' called the USA
to be honest: I find it difficult to believe that all of this is actually happening... -
Bruno
On 28 Apr, 2009
Hierbij de duidelijke reactie van FT op de tests.
US bank stress tests
Published: April 28 2009 08:25 | Last updated: April 28 2009 20:19
Bureaucrats have long come up with plans that are messy in the short term and pointless in the long term. The US Treasury’s stress tests add to this history. At first, banks were told to keep schtum over their scores; the Treasury would reveal all after May 4. Now it seems banks may present their own results that week anyway.
That would guarantee a crazy five days with banks filing at different times and numbers being presented in the most flattering way or challenged outright. Worse, banks already know their results. Those that have passed will not fire anyone for leaking. Meanwhile, rumours are flying round that Citigroup, Bank of America and a clutch of regional banks have failed. Shares in Citigroup on Tuesday morning fell by nearly 5 per cent while those of Bank of America tumbled almost 7 per cent after earlier losses were mitigated by an unexpectedly sharp rise in consumer confidence data for April. This is no way to run a financial market. The Treasury should simply forget the deadline and come clean now.
Investors with a longer perspective should ignore the results regardless. The white paper explaining the methodology behind the stress tests was flawed. Finger-in-the-air growth and unemployment forecasts will have little bearing on the ultimate health of the banking sector. When Japan’s asset bubble burst in 1989, real gross domestic product grew 5 per cent in 1990, then 3 per cent, and was positive for 10 out of the next 12 years. The banking sector still needed rescuing almost a full decade and a half after the first popping sound.
American banks need higher capital ratios. But getting there by shrinking assets will stunt economic growth. Even if banks are forced to raise their tangible common equity to tangible asset ratios to 4 per cent, that is still 25 times geared, not to mention at least two percentage points lower than the average for the decade up to the meltdown last year. As ever, investors must ignore the bureaucrats and stress test balance sheets themselves.
