Thursday, April 30, 2009

Stress Tests are Not Stressful Enough

Last week, when the U.S. Treasury unveiled the basics of their lender “stress tests”, the Fed concluded that “most U.S. banking organizations currently have capital levels well in excess of the amounts required to be well capitalized. ”Simultaneously, they also claimed that the banks needed more capital. Apparently the Fed has little understanding of irony.

Why would our central bankers conclude that “well capitalized” banks need “more capital?” Quite possibly, they believe, as I do, that the rosy economic assumptions that form the basis of the “stress tests” may be far too optimistic. I believe that neither the Fed nor the Treasury have any will to paint a clear picture of our financial turmoil. But that won’t stop them from operating under those assumptions.

A brief examination of the stress test assumptions shows why the Fed should be hedging their bets. (more)

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