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Bank Stress Tests Have Already Failed

Sunday, May 3, 2009, 4:39 PM
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Sunday, May 3, 2009

Executive Summary

  • The bank stress tests are a sham.
  • Reality is already worse than the worst case stress test scenario.
  • The stress test results will be used as a “positive indicator” anyway.
  • Don’t fall for it.

The bank stress tests, the results of which are to be announced later this week, have already failed. Why? Because the stress test is supposed to assess how a bank’s loan portfolio would fare under a variety of scenarios, but reality is already far worse than the worst-case scenario. The FDIC, Treasury, and Federal Reserve went ahead with their weak input assumptions to conduct the stress test, even though they knew that reality was outpacing their most dire scenario.

In other words, the stress test is a sham.

 

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