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More Stress Tests?   June 8th, 2009
Congressional oversight panel indicates more stress tests may be necessary       


More observations...

The financial sector has recovered now that the government has signed-off on their strength as a result of many banks passing their stress tests, and others raising the required funds stipulated in their stress test results. All is well, right? Wrong.

A Congressional oversight panel is now indicating that the government might need to execute the stress tests again:

The Congressional oversight panel monitoring the government's bank bailouts is recommending regulators repeat 'stress tests' of financial firms if the current recession deepens...

'We recommend that Treasury publicly track the status of its stress test macro-economic assumptions [including unemployment forecasts]-- and repeat the stress test if the adverse scenario assumptions have been exceeded,' the panel said in the draft report.

Basically what they're saying is that the stress tests tested for the ability of banks to weather certain adverse financial conditions based on certain assumptions, such as a given unemployment rate. The panel is saying that if the real economic conditions observed in the economy exceed those assumptions that the stress tests should be executed again with even more aggressive negative assumptions.

If the stress tests actually served some useful purpose then this would make sense--if the tests assumed a maximum unemployment rate of 8.9% and now we're at 9.4%, shouldn't the test be run again with the new "worst case" scenario?

However, the reality is that the stress tests serve no useful purpose other than to make the market nervous. The market was relieved after the last stress tests were completed since, at least, they were now behind us and there was some certainty regarding the extent of government meddling in the private financial sector.

But now the Congressional oversight panel is raising the specter of additional stress tests. The stress tests won't make the banks stronger but the threat of additional tests will make the market nervous about investing in banks (given the treatment of GM and Chrysler investors) and may cause more nervousness about the economy as a whole.

I fail to see how this can be considered a good idea.

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