Stress Test

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tabletop's picture
tabletop
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Joined: Jan 14 2009
Posts: 29
Stress Test

Anyone want to summarize exactly what is involved in the "stress test" of a bank.  When I think "stress test" I think of replicating a software environment and testing it far beyond normal operating capacity.  How are they possibly going to replicate a bank and realistically "stress test" it given the complexity and multiple tie-ins to other global systems.  Seems like a canard to me.

CB's picture
CB
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Joined: Mar 18 2008
Posts: 365
Re: Stress Test

http://www.salon.com/tech/htww/?last_story=/tech/htww/2009/02/25/stress_test_revealed/

Quote:

As promised, federal officials revealed more details on Wednesday of how regulators intend to conduct "stress tests" to determine the financial health of the nation's biggest banks. But anyone expecting "bold" or "swift" action, to borrow a couple of words that we've been hearing a lot about from President Obama lately, is likely to be disappointed.

The stress tests, which officially begin now, are to be finished no later than the end of April. They will evaluate the financial position of banks against two scenarios, a baseline scenario consistent with consensus economic projections by a handful of forecasters, and a "more adverse scenario" that sees unemployment rising above 10 percent in 2010, and home prices falling another 22 percent in 2009.

If a bank is deemed under-capitalized it will then have six months in which to raise private capital before it must receive government aid. That aid will come in the form of convertible preferred secretaries which can be converted into common stock as needed.

But for now: The party line from the government to Wall Street is that there is no need to panic, and no requirement for nationalization:

Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized.

 

The link below has some detailed information on how bank capitalization is measured and the relationship of common to preferred shares as it might relate to CitiBank or others under this program:

http://baselinescenario.com/2009/02/24/tangible-common-equity-for-beginners/#more-2683

strabes's picture
strabes
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Posts: 1032
Re: Stress Test
crkeesey wrote:

 Anyone want to summarize exactly what is involved in the "stress test" of a bank

Well, all that's really involved is a big national government trying to look like it's doing something on TV so the masses think "they got it under control."  And then the real motive is for them to reach in even deeper into this industry, pretty much run it, and prop up the big banks over the small banks.

I say that partially in jest, but mostly in truth.  The market knows whether these banks are solvent or not. The market is by definition a stress test for banks/companies and it measures their score quite well without the help of bureaucrats in DC.  It's truly laughable that a "secretary" in DC suggests that it's a novel idea to test banks.  And the sheep say "yeah, duuuuhhhh, good idea boss."  There are already published grade reports on banks across the country.  And if they aren't solvent, bankruptcy proceedings are precisely designed to handle it.  But the market, and normal operations like bankruptcy, doesn't prop up the national government and national Wall St institutions.  

Farmer Brown's picture
Farmer Brown
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Joined: Nov 23 2008
Posts: 1503
Re: Stress Test

Besides what's already been mentioned by Strabes, the idea of the government determining the health of these banks is laughable because the derivative instruments held by these banks, which Chris M has highlighted several times in his alerts, are unknown even by the banks themselves. 

That's the whole problem - not even the free market can determine the value of these derivative investments, which is why it's been so hard for the banks to sell them to private buyers.  Instead, they're hoping for the government (taxpayers) to be the sucker and pay above-market prices for them.

This whole idea looks like a canard designed to either a) make the public think everything is under control, or b) position the government for further takeover of the banks for the "public good".  

Welcome to 1984 2.0.

strabes's picture
strabes
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Joined: Feb 7 2009
Posts: 1032
Re: Stress Test

Patrick's right on the money...that's why the only banks getting Weiss ratings of A- to A+ are those with very small percentage of derivatives and mortgage exposure on their balance sheets.  those at C or below are going out of business. 

of course, government involvement throws the whole grading system up in smoke...big C and D banks are being propped up and they're buying small A banks!  exactly the opposite of what should be happening.   

Patrick wrote:

This whole idea looks like a canard designed to either a) make the public think everything is under control, or b) position the government for further takeover of the banks for the "public good".  

Unfortunately I think it's both and, not either or!  Surprised 

SamLinder's picture
SamLinder
Status: Diamond Member (Offline)
Joined: Jul 10 2008
Posts: 1499
Re: Stress Test

I watched the national news people explain the stress test situation earlier this evening. When I heard what it consisted of (already explained in previous posts), I about fell out of my chair!

I am amazed that this government thinks we are so stupid as to buy off on such an inane concept!

I don't know who they think they are fooling, but it isn't me and, knowing the gang on this site, it isn't us!

Aaarrrrrggghhhh!  Yell

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