Comments on: Stress Tests: What Was the Point Again?

By: Sunday links: offense to defense | HeatUp.com - Internet News

Sunday links: offense to defense | HeatUp.com - Internet News — Fri, 15 May 2009 15:46:18 +0000

[...] “At some point, increasing bank profitability – if it can be sustained – should translate into increased competition, lower spreads, and increased availability of credit. But we are a long way from that point.” (Baseline Scenario) [...]

By: Chris Rogers

Chris Rogers — Mon, 11 May 2009 04:48:03 +0000

In returning to the actual question, on appearances it would seem that the bank stress tests undertaken by the Fed and Treasury was more of a PR/Cosmetic exercise in trying to restore some ‘trust’ in to the system.
The fundamental problem afflicting banking todate is not the write downs they have been forced to make, but a lack of lending between themselves and from money markets in general, or money markets loans where the terms and insurance costs are so high as to make them unaffordable – hence quantitative easing on both sides of the pond.
The credit/liquidity crisis is actually a matter of confidence or trust. Living in Asia and dealing with both bankers and regulators here, I can assure many readers that banks in the region are flush with cash/deposits – unfortunately, as the US found to its peril, that money will not be coming your way as most are now risk averse, meaning that people want a no-risk destination for their money. Obviously, this has removed a huge swathe of money from the money markets, if all of you get my drift, this has resulted in both the liquidity crisis, which has led to deleveraging of assets, which has further exacerbated the credit/liquidity crisis. All this in most instances is a result of the development of the ‘shadow banking system’, addiction by banks to cheap inflows of short term cash and inability to replace it with depositors cash.
An examination of the tsunami which hit Northern Rock in the UK clearly demonstrates this process, one I’m afraid to say is of a huge proportion in the USA – hence, even with the supposed US$700 billion bailout and guarantees in excess of US$11 trillion, the liquidity crisis continues apace. Citi’s Matt King wrote an interesting 100 page report on this in late January, and whilst at the time he was crystal gazing, its uncanny how accurate many of his projections have become in May this year.

By: silly things

silly things — Sun, 10 May 2009 23:10:39 +0000

I just want to say I enjoyed reading this particular presentation :-)

One of the reason banks have not lend more is because of uncertainty over government action that may threaten their survival (e.g. WaMu and Wachovia). From the bank’s perspective the choice between lending and survival is an obvious one.

By: BlogForTech

BlogForTech — Sun, 10 May 2009 17:14:45 +0000

I think everybody is stress during recession

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By: Leland Lehrman

Leland Lehrman — Sun, 10 May 2009 04:27:13 +0000

I can’t help but point out that the following sentence is simply not true, except given all the baseline assumptions we need to stop making forever following this crisis:

“without banks that are willing to lend money for people to buy houses, cars, and consumer goods, or for businesses to invest in real estate, factories, inventory, software, etc., none of these things will happen.”

No. No. No. Despite the fact that this appears to be so in any country where banking is strictly a private monopoly, this never was and never will be true except in a relativistic circumstantial way.

Furthermore, only a banker could possibly believe this one:

“So the ultimate goal is to ensure the availability of credit.”

Unless of course credit were designed as a public utility or managed in a competitive way between public and private sector, as is done in Germany and perhaps Sweden, which gets the absolute highest marks in the world for democracy and quality of life.

The essential discussion is what are the steps necessary in order to ameliorate quality of life and design a sustainable productive economy. Where banking fits in that is now, and should always have been, a very open question.

Leland

By: Per Kurowski

Per Kurowski — Sat, 09 May 2009 23:06:08 +0000

You are absolutely right Linus Wilson

It is time besides talking about riskweighted assets also start talking about equity to total bank assets

By: Linus Wilson

Linus Wilson — Sat, 09 May 2009 23:01:21 +0000

Any “test” that thinks a bank with a market cap of 1 percent of total book assets only needs to raise common equity of .25 percent of total book assets is not really planning for the worst case or the baseline scenario.

By: cycs

cycs — Sat, 09 May 2009 22:38:14 +0000

Oops, just posted the link below.

By: cycs

cycs — Sat, 09 May 2009 22:37:24 +0000

The video clip of William Black about AIG stress testing is available on this blog post:

http://www.fundmymutualfund.com/2009/05/william-black-on-yahoo-techticker.html

along with some others of note.

By: lambert strether

lambert strether — Sat, 09 May 2009 21:35:32 +0000

Got a link on Black and AIG, Boris? That’s interesting.

By: Boris

Boris — Sat, 09 May 2009 18:49:03 +0000

Will someone please respond to William Black’s point that AIG was stress-tested in 2008 and came up roses, as were Fannie and Freddy earlier in the decade. Why does anyone listen anymore? These numbers seem worth far less than the paper (electronic screen these days, I guess…) they are printed on. Which brings us back to the title of your post here: what’s the point? PR, I guess. If they can sucker in even a few more people yet one more time, that much more into their pockets.

By: rfreud

rfreud — Sat, 09 May 2009 15:45:37 +0000

A lot of what looks like loan growth or demand for loans, especially business loans, is really refinancing. Really robust economic growth is necessary to produce new loan demand or opportunities to lend to new businesses or lend more to exisiting growing businesses.

By: Per Kurowski

Per Kurowski — Sat, 09 May 2009 15:30:35 +0000

What a stress!

Now 19 large bank holdings companies (BHCs) have been told what to should do in order to hang around and so they should at least be a little bit less stressed… but what should we do with these stress-test results?

First it hard for us to interpret the results of the stress test because they all refer to risk-weighted assets” and this we know that no matter its pompous name this does not mean anything absolute. Not only are the weights completely arbitrary, like for instance 20% for triple-A rated assets, but also those weighing, the credit rating agencies, have clearly shown themselves not to be the most very trustworthy risk surveyors. It also makes any comparisons between BHCs impossible since the differences between the risk-weighted assets could be larger than between apples and oranges.

But second and most importantly the stress test does not include any type of recommendation. Do we want to strengthen the weaker BHCs so that these survive or are we looking to show who are weak so that we can strengthen the stronger to make sure that some of the BHC survive? Why do we not put all our money in the group outside the BHCs? What a stress!