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Stressing the Bank 'Stress Tests'
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David Reilly warns that though the U.S. Federal Reserve's stress tests of U.S. banks showed they passed- including approval for dividends and share buyback- except for Ally Financial and Citigroup, this can be deceptive. True, the Fed used 13% unemployment and sharp drop in stock market prices as conditions. The problem is with capital ratios. The Fed used a leverage ratio of 3%. It should not be forgotten that the financial crisis of 2008 was caused by excessive leverage and risk. Tested on this measure the banks fail to achieve safe levels of leverage and risk. Under the Fed's highest stress scenario Citigroup ratio was at 2.9%, Morgan Stanley's at 3.4%, Goldman Sachs and J.P. Morgan at 3.8%- what ths means is that the leverage for these banks was at 26-29 times capital. Reilly raises the question- how is this so different than the leverage used by these banks before the crisis. The stress tests in the U.S. by the U.S. Federal Reserve are lauded for being better than the European Banking Authority's stress tests, but is this a standard by which to judge them? Before the collapse of Lehman in 2008, experts including Anil Kashyap at the University of Chicago, pointed out that for every $1 of bank losses in a deleveraging cycle bank lending goes down at banks by $10, and for investment banks at $20-$30 depending on leveraging- in David Henry and Matthew Goldstein, Business Week, July 16, 2008, How Bad Will It Get on Wall Street? Lehman's leverage ratio was between 24-31 times capital before the crisis. Worse, by saying banks are now safe compared to the situation before the crisis, is the Fed giving the green light to banks for some of the same leveraging behaviour that ocurred before the crisis?
Capital adequacy ratios for banks in 2013 and rules for "risk weighting" of assets which do not reflect real risks
07/10/2011
Sheila Bair says the U.S. Fed's 2013 stress tests of Bank of America and Morgan Stanley do not reflect the real risks taken on by the banks, because of the rules applied for capital adequacy ratios.
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Morgan Stanley Seeks a Fixed-Income Fix
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Morgan Stanley Buys Its Way Back Into Investors' Good Book
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Stressing the Bank 'Stress Tests'
Wall Street Journal 03/14/2012
Stress Tests Won't Prevent the Next Financial Crisis
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Regulators Let Big Banks Look Safer Than They Are
Wall Street Journal 04/01/2013
Stress tests of U.S. banks by the U.S. Federal Reserve in 2012
11/22/2011
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Fed Publishes 'Stress Test' Procedures
Wall Street Journal 11/10/2013
Stressing the Bank 'Stress Tests'
Wall Street Journal 03/14/2012
Stress Tests Won't Prevent the Next Financial Crisis
Wall Street Journal 03/19/2014
Wall Street Journal 11/23/2011
Fed Plans New Stress Tests for Biggest Banks
New York Times 11/22/2011
More Vigorous Stress Test for Banks
New York Times 11/23/2011
Stress Tests of U.S. banks by the Federal Reserve in 2013
03/14/2012
Grouped Articles
Goldman and JP Morgan Satisfy Fed with Capital Plans
New York Times 12/02/2013
Stressing the Bank 'Stress Tests'
Wall Street Journal 03/14/2012
Stress Tests Won't Prevent the Next Financial Crisis
Wall Street Journal 03/19/2014
Most Large Banks Could Cope in Event of Turmoil, Fed Says
New York Times 03/20/2014
Disclosure efforts for stress tests of U.S. banks by the U.S. Federal Reserve in Feb. 2012
06/16/2011
The U.S. Federal Reserve's Daniel Tarullo pushes for disclosure saying it is critical for investors to have this information.
Grouped Articles
The Power Behind the Throne at the Federal Reserve
New York Times 07/31/2013
Fed Boosts Pressure on Banks Over Capital Levels
Wall Street Journal 08/20/2013
Fed Publishes 'Stress Test' Procedures
Wall Street Journal 11/10/2013
Stressing the Bank 'Stress Tests'
Wall Street Journal 03/14/2012
Stress Tests Won't Prevent the Next Financial Crisis
Wall Street Journal 03/19/2014
Lenders Stress Over Test Results
Wall Street Journal 03/05/2012
The 2013 U.S. Fed stress tests of banks and the flawed capital adequacy ratios that do not represent real risks at banks
03/14/2012
Grouped Articles
Fed Publishes 'Stress Test' Procedures
Wall Street Journal 11/10/2013
Goldman and JP Morgan Satisfy Fed with Capital Plans
New York Times 12/02/2013
Stressing the Bank 'Stress Tests'
Wall Street Journal 03/14/2012
Regulators Let Big Banks Look Safer Than They Are
Wall Street Journal 04/01/2013
Stress tests of U.S. banks by the Obama administration.
05/06/2009
What the stress tests of the banks by the Federal Reserve did and what they failed to do. By coming up with amilder stress test after intense bargaining with the banks have the stress test adequately protected transparency? Have they muddied up the problem of putting banks on their feet by not taking the strong action to clean up balance sheets that is needed, and making it appear that banks are healthier than they actually are.
Grouped Articles
Fed Publishes 'Stress Test' Procedures
Wall Street Journal 11/10/2013
Stressing the Bank 'Stress Tests'
Wall Street Journal 03/14/2012
Stress Tests Won't Prevent the Next Financial Crisis
Wall Street Journal 03/19/2014
We Can't Subsidize the Banks Forever
Wall Street Journal 05/06/2009
Banks Need Fewer Carrots and More Sticks
Wall Street Journal 05/07/2009
Banks Need Funds, but Taxpayers May Not Have to Pay
New York Times 05/07/2009
How good were the U.S. Federal Reserve's stress tests of 2012?
07/16/2008
Reilly questions the leveraging aspect of the Fed's 2002 stress test results as they leave U.S. banks leveraging at between 20-30 times capital, the situation that prevailed before the crisis. Experts including Anil Kashyap at the University of Chicago pointed out how the process of deleveraging works in reverse before the collapse of Lehman in 2008- for every $1 of bank losses the deleveraging cycle reduces bank lending by $20- $30.
Linked Articles
Stressing the Bank 'Stress Tests'
Wall Street Journal 03/14/2012
How Bad Will It Get on Wall Street?
BusinessWeek 07/16/2008
The U.S. Federal Reserve's March 2012 U.S. bank stress tests and the questions about overoptimistic assumptions
03/14/2012
Experts question the the overoptimistic assumptions for losses on home equity lines of credit, second lien mortgages and legal settlements. The capital ratios for the banks shown under the stress tests of 3-4% indicate high levels of leveraging, one of the principal causes for the banking crisis of 2008-2009.
Linked Articles
Stressing the Bank 'Stress Tests'
Wall Street Journal 03/14/2012
Questions as Banks Increase Dividends
New York Times 03/14/2012
The March 2012 U.S. Federal Reserve U.S. bank stress tests and the continuing problem of highly leveraged banks
03/14/2012
Linked Articles
Stressing the Bank 'Stress Tests'
Wall Street Journal 03/14/2012
Wall Street Journal 03/14/2012
Leveraging of banks U.S. banks in 2012 under the U.S. Federal Reserve stress tests of March 2012 and the leveraging at the time of Lehman's collapse in 2008
07/16/2008
The high rate of leveraging of banks today compared to 2008, suggests that the U.S. Federal Reserve may have prematurely declared the banks safe, say experts.
Linked Articles
Stressing the Bank 'Stress Tests'
Wall Street Journal 03/14/2012
How Bad Will It Get on Wall Street?
BusinessWeek 07/16/2008
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