Let's take a stress test. Let's say that you wanted to test your financial security. I might put in that test things like: your verified income, housing expenses, debt obligations, and other's evaluation of your "credit worthiness." Oh. I see this looks familiar. It looks like a standard credit or home loan application.
Now let's say that in this stress test we allowed you to decide on your own level of debt. For example, you are obliged to pay off that long term loan, but if all goes well you hope to pay that off within the next year. So, let's knock that amount off the list. And that home loan? Well, you're currently paying $1,000 a month, but if you get this loan you will be paying $850 a month. So let's take that figure. Clearly, such assumptions and choices on your part MIGHT misrepresent your financial situation.
Now let's stress test those financial institutions. However it was that the Obama administration originally wanted to test the banks, the banks didn't like. So the banks pushed back. Effectively, they got the calculations of capital needed changed. This is a nice trick if you can do it - and they successfully did it. But even before the stress test they got something else changed - the way they value their assets. Rather than providing the market value of the mortgages they held, they could provide what they think those assets are worth in a non-distressed market:
Bankers bitterly complained that the current market prices were the result of distressed sales and that they should be allowed to ignore those prices and value the securities instead at their value in a normal market. At first FASB, pronounced FAS-bee, resisted making changes, but that changed within a few days of a Congressional hearing at which legislators from both parties demanded the board act.Even given the change in accounting rules, and whatever other changes in the "test" that was won by the banks, nine of them still failed. Oh excuse me, they didn't "fail," they did not pass the test. Oh EXCUSE ME! All 19 Banks Pass Stress Tests ("But many require new capital infusions to stay solvent). That little gem is from"Consumer Affairs." In a sop to those we generally think of as "consumers," the article states:
Consumers shouldn't be concerned that their bank was deemed to need more money. Even if a bank failed, deposits of up to $250,000 are insured by the Federal Deposit Insurance Corporation. Besides, the whole idea behind the stress test was to make sure than none of the 19 banks fail.So what are the consequences for banks who failed, excused me, did not pass, excuse me, passed but could be better? (And people yell about the schools not being tough and honest with students). Well, according to an article at the BBC - "Ten US banks fail 'stress tests' " (emphasis mine):
The treasury secretary said he believed that while the majority of the banks would be able to raise any additional money they need from private sources, if they were unable to do so the government may have to provide them with more taxpayer money.
Well that's telling them! (Read in a stern and parental voice) "Correct those deficiencies or the taxpayer will give you more money!"
Other pertinent articles
Stress Tests for Beginners. The Baseline Scenario. 5/04/09.
The Mark-to-Market Myth. The Baseline Scenario. 4/02/09.
Fed: Banks Tighten Lending Standards Further. Calculated Risk. 5/04/09. These charts are instructive.
Government Offers Details of Bank Stress Test. Andrews & Dash. NY Times, 2/25/09. (But the article does not)
Stress Test for Banks Exposes Rift on Wall St.. Dash. NY Times, 2/24/09. (Actually pretty good given the successful change to accounting valuing changes)
