Bank Stress Tests

(A Tiger by the Tail)*

 

I wrote on February 25 that the newly-announced bank stress tests were mostly window dressing since bank examiners stay in constant touch with the financial condition of the banks they regulate, even having their own offices in the largest banks. I cautioned that the publicity given to this charade could backfire on the regulators by triggering calls for transparency. I believe I may have stumbled upon something.

(See my poem about transparency at the end of this piece.)

After much waffling back and forth, officials have announced that somebody (probably the various bank regulators) will announce something about the results on May 4. They are not sure what, but something.

There are really no good options. Chairman Bernanke has already said that this is not a pass or fail test-that all 19 would pass and be certified as adequately or fully capitalized, even if some additional capital must be added to make it so. (My words; not his.) Such a Lake Wobegon solution is not likely to satisfy. Inquisitive minds will want to know which banks passed easily and which were a stretch. If all were good, which were most best . . . in other words, least worst?

This is all very disconcerting to bank regulators who are accustomed to keeping bank financials confidential, and rightly so.  After all, deposit insurance is a great equalizer. Retail depositors can rest assured that their individual deposits (even more than one) are safe below the $100,000 level, temporarily raised to $250,000.  Safe is safe. No fine distinctions need to be made.

Any implicit ranking of the "Big 19" will cause problems for the equal banks that are not quite as equal as others. My guess is that the regulators are frantically meeting trying to get themselves out of the foolish promise with the least amount of damage. Maybe this will put a damper on the notion that transparency is the answer to everything-that more information is always better than less. Here's a little poem I wrote about transparency years ago.

Transparency is currently a central banker cause
But it reminds me too much of sausages and laws
I think translucence, like my shower door, is a good compromise
It lets in the light, but keeps out the flies.

*In an effort to curry your favor, I'll spare you the YouTube version of Buck Owens' "Tiger by the Tail."

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  1. [...] normally accustomed to keeping bank financials confidential, former Dallas Fed president Bob McTeer writes on his [...]

  2. [...] in the end, a test, and in a test, failure is an option. As former Dallas Fed president Bob McTeer put it: Any implicit ranking of the “Big 19″ will cause problems for the equal banks that [...]