Chris Whalen on the Fed’s stress tests

Chris Whalen is a highly regarded banking analyst who has been quite critical of the goings on with banks and their regulators. However, he is very even-handed in his assessment of the Fed’s latest stress tests of the largest 19 banks. The banks are much better capitalised than they were when the crisis broke out and than European banks but the second lien exposure is still with us as are the underwater mortgages carried at par on banks books.

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Clearly, the stress tests were as much a PR exercise as they were financial analysis, one reason that the Fed merged macro economic analysis and financial analysis to build stress scenarios. The point is reassure the public that US banks are well capitalised so that they can go back to paying out larger dividends and buying back shares.

In reality, however, stress tests are of limited value as the stress tests of Iceland’s banks before their failure proved and as the stress tests of AIG, Fannie Mae and Freddie Mac proved.

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1 Comment
  1. David Lazarus says

    The fact that the banks are allowed to buy back stock is also wrong. The prime reason is to boost the price so that the government can then sell at a profit, and also that the stock options of directors go back into the money.

    As for Basel. I think that the allowance of risk models will mean that banks will be able to have much lower capital than they actually need because their risk model says they have no risk. Just like MBS are all AAA and not junk. As for the worst case scenario of 20% fall in real estate prices, I doubt that is a worst case. I privately think that 10% is very likely and overshoots to 20% are very possible. The possible losses on second mortgages are grossly understated. So this is window dressing but for whom?

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