Shhh! Don't Mention The Stress Test

The Treasury has encouraged the banks not to mention the elephant in the room (the stress tests) during their first quarter earnings announcements which are due before the stress test results are out later this month. Not sure what the big deal is seeing as it is pretty clear ALL of the major institutions are going to pass! What is the point of giving a test that ensures everyone passes easily, where is the rigor in that?

The truth is the real life stress test was the market environment in October and November of 2008. The results were clear, the banking industry failed. Miserably. Without government intervention, well who knows, but the banks lacked the liquidity and the solvency to continue as a going concern under their current structure.

It would seem to be clear what went wrong and what needs to be adjusted going forward to weather storms of this nature in the future. The good news about the extreme nature of the past year is that it sets a new level for worst case scenarios. Hopefully that will be reflected in capital and reserve ratios and debt limits going forward otherwise...

The stress test was likely for the benefit of the public to perceive something being done as well as buying the administration time to develop a plan. In that respect the stress test probably was beneficial. It took time to get into this crisis and will take time to dig our way out.