Could More Stress Tests Save Our Banks?

When Treasury announced it would conduct "stress tests" to assess the robustness of the country's largest banks, I thought to myself: That sounds like such an obvious idea, why don't we do it more regularly? When they resulted in a ferocious round of re-capitalization for the banks, it seemed all the clearer that more trustworthy (or at least trustworthy-seeming) information about our banks' health would make stoke investor confidence.

Hey look at that, smart people are asking the same thing!

Zubin Jelveh from The New Republic says two interesting things. First he notes an op-ed suggesting that capital requirements for large banks might not be the panacea Treasury hopes, since "the five largest US financial institutions subject to Basel capital rules ... were between 50 per cent and 100 per cent above the [capital requirement] minimums and 23 per cent to 61 per cent higher than the well-capitalised standard." All five either failed or were forced into government-assisted mergers..

Second he plugs the stress-test-forever! approach to reform. It's a simple argument. The fact that banks

were able to raise $87 billion in capital after the stress tests revealed information about their health. In a sense, more testing would mean that the much-needed systemic risk regulator would embrace the role of an activist hedge fund manager like Bill Ackman or David Einhorn, both of whom did their own stress tests on Lehman, Ambac, and MBIA -- and turned out to be right about their woeful prospects. The presence of such a regulator could be just as important as higher capital requirements.