Financial Fitness Sought Through Bank “Stress Tests.”
by Efin Advisor | February 26, 2009
The US Treasury has made it mandatory for banking institutions with more than $100 billion in assets to undergo “stress tests” which will be partly used to determine whether the banks need additional capital from a new program that could provide additional monetary reinforcement.
The stress test, a kind of financial fitness workout, is based on a hypothetical scenario in which the economy shrinks 3.3 per cent this year and barely grows next, with unemployment averaging 8.9 per cent this year and 10.3 per cent in 2010. The idea is to look at how banks would hold up under such a stressful scenario.
Troubled US banks will have six months to raise capital from either the market or the US Treasury if the government’s stress tests determine they need to bolster their balance sheets.
“US government ownership is not an objective” of the program,” Treasury said. “However, to the extent that significant government stake in a financial institution is an outcome of the program, our goal will be to keep the period of government ownership as temporary as possible.” Treasury secretary Tim Geithner and Federal Reserve chairman Ben Bernanke both said the alternative of regulatory seizure and outright nationalisation of weak banks was not the best way forward.
A senior administration official said the hope was that by strengthening the big banks pre-emptively they would make this adverse scenario less likely.
This makes absolutely perfect sense. We should be trying to figure out when and if a bank is going to have a failure, because such a failure creates a massive societal harm, worthy of us watching out for. I can’t attest to how good of a test this one actually is (i dont kn ow that much about economics or monetary policy), but if we assume that this is a valid test, there is no reason we shouldn’t make banks undergo such a test.
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This is not the government’s right to do. I dont get it, why should the government be interfering in the common man’s business. These people are just trying to run their business and run their lives bbased on the principles they have founded and know what htey are doing. We should trust them to keep running. If it doesn’t make business sense to fail the stress test, then the businesses wouldn’t put htemselves in situations where they would fail.
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Rebecca Reply:
February 26th, 2009 at 12:53 pm
Are you kidding me? Because these businesses, when left to their own devices, didn’t, you know, CAUSE THIS WHOLE MESS! I just do not understand how anyone can hold this belief anymore. What we need is the government to at least give these businesses guidance. We do this all the time with regulations in every other business. Why can’t we just make sure that banks, which we are giving billions of dollars to and helping out a lot, are upholding their end of the bargain by not screwing everything up. When a bank fails, we all fail a little, its a public right. Lets make sure things work
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Wait, why is there random mentions of government ownership of banks? I feel like them trying to preempt people saying they are going to own the banks is a sort of indicative of the fact that they are thinking of buying the banks. I understand maybe offering a stress test for banks and for having requirements that banks not fail the stress test, just as a matter of monetary policy (we do this type of thing all the time), but that doesn’t mean we should even be mentioning buying banks. If the government controls all the money, they control all the loans and all the mortgages and what businesses succeed and which ones fail. We need to keep the banks out of the government’s hands.
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Joseph Reply:
February 26th, 2009 at 12:56 pm
Saying we are not buying out the banks does not mean they intend to buy out the banks. Just the opposite, in fact. What probably happened was someone asked at a press conference a question about buying up the banks and this was the answer they gave. No reason to jump to the conclusion that we are automatically buying oout banks just because we are helping them.
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Rocco Reply:
February 26th, 2009 at 12:58 pm
Why is buying the banks out such a scary notion? We already have a sort of nationalization such as with the Federal Reserve and the bailout itself nationalizes the banks a lot. Why shouldn’t we buy them all up? It would actually make things a lot better since it would be easier for people to get loans, there would never be fears of bank runs and we could regulate the bank policies a lot. Current banks are out to screw people and make money for themselves. Why don’t we make it so the bank makes money for the country while helping individuals out
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I’m pretty unclear on how this would work. Is there some big computer that we can plug some sort of number into and ta-dah out comes our financial future. If so, shouldn’t we be using this magical entity to do other fantastic things. Maybe if we can know the future, we can find a way out of Iraq. Also, what happens in the likely event that we are wrong, did we just undergo a tedious process for nothing? This seems pretty shaky to me.
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This makes great sense. I wonder why we didn’t do some sort of projections before the last round of bailouts- to at least attempt a prediction of the outcome of actions. I’m pretty sure that this is a good idea, just as an investor looks for a strong investment, or a horse racer looks for a good horse, the government should invest in the companies which are least likely to waste the taxpayers’ money.
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