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Grading The Stress Tests
ByA mini econoblogger round up. James Surowiecki:
Treasury’s report on the stress tests says that the banks’ total losses through 2010 (including the losses suffered in 2007-2008) could total $950 billion. That’s close to the I.M.F.’s estimate that total losses for U.S. banks from the financial crisis will be $1.1 trillion. It’s close particularly when you consider that the I.M.F. was estimating losses for all eight-thousand-plus banks in the U.S. system, while Treasury’s number is only an estimate for the losses of the aforementioned nineteen biggest banks. Taking that into account, Treasury’s numbers look very similar to the I.M.F.’s, which at least suggests that the government used reasonable projections of future losses, and did not, as many feared, rig the tests to make the banks look good.
The stress testsand the attempts at raising capital that will followare about determining which banks are to become largely wards of the state (as Citi already is), and which deserve to escape from direct government control sooner rather than later. From the panicked, throw-money-at-them-all approach that prevailed last fall, we're now moving to a more selective one that separates winners from losers. That is as it should be, and the oft-heard criticism that the stress tests made it too easy to be a winnerbecause the "adverse" economic scenario contemplated in the tests was far from a worst casedoesn't take anything away from the fact that it's useful to know the relative scores.
...this whole song-and-dance means that the banks are still operating with a government guarantee, but without government control. They can go out and try to raise money, and investors know that the government is going to cover them if things go badly. The plan assures that the banks will remain alive, no matter how troubled, because Treasury will always swoop in to save the day.
Testing for solvency under extreme scenarios is a tricky and opaque process. Unless markets trust the government to be impartial, it ultimately provides little clarity on the state of the banks' balance sheets. One of the few insights we did gain from the tests was that nationalisation appears to be off the table. But the government took a big gamble on this one.
