Thoughts & Comments
The Stress Tests: Yes, They Were Stressful Enough
That's what the early data shows, at least.

Thomas Brown  ( about me )
Posted 08/05/2009

Can you believe it’s already been six months since the Treasury announced it would put the country’s big banks through a bunch of stress tests? Why, it seems only yesterday, doesn’t it?  

I don’t mention this now just to marvel at how time flies, though. There’s a more practical reason: it’s been six months. Which is to say, two quarters have passed since the Treasury Department published the hypothetical data that make up its “more adverse” economic scenario. So by now, we can start to take the actual, historical data and see how it compares to the Treasury’s stressed-up numbers.  

So how goes everything? More than a few skeptics, you may recall, dismissed the stress tests early on as “not stressful enough”--in large part, went the argument, because a single number, the unemployment rate, has already topped the rate Treasury plugged in back in February.

To which the rest of the relevant numbers can now say, phooey. If you add up the net chargeoffs the big banks that underwent the stress tests have taken so far this year, and look at the hypothetical chargeoffs the banks would have taken under the Treasury’s stress case, the reality is nowhere near as bad as the government’s fevered imaginings. Take a look:


In particular, in the latest quarter, the banks’ NCOs came to 3.16% of loans, far short of the 4.16% laid out in the stress case. And as you can further see, chargeoffs under the stress scenario won’t peak for another three quarters, at which point they’ll top 5%.

We’ve said it before and we’ll say it again: the stress tests were a colossal waste of time and money. The only tangible effect they had was to serve as an excuse for the government to force banks to go out and raise new capital they didn’t need, at ruinous prices.  

We all heard a lot of talk not so long ago about “zombie banks.” Not anymore. Now, instead, the banking industry has become ridiculously overcapitalized. And the people who insisted the February stress test was insufficiently severe were—and are—are kidding themselves.

What do you think? Let me know!

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Erich Riesenberg Posted On 8/6/2009 2:08:43 PM

"it’s been six months." No, it hasn't. You are insane. Isn't this the same web site that denounced Obama by measuring the decline in the stock market since the date he announced his plan to run? Flat out NUTS!

Erich Riesenberg Posted On 8/6/2009 2:09:20 PM

"it’s been six months." No, it hasn't. You are insane. Isn't this the same web site that denounced Obama by measuring the decline in the stock market since the date he announced his plan to run? Flat out NUTS!

Joel Posted On 8/6/2009 2:34:02 PM

Banks obviously are not overcapitalized. If they were, they'd be making loans left and right. Instead, small businesses can't get credit and banks are raising fees to generate more income. And where banks 50 years ago paid savers 3% and charged borrowers 6%, today they are paying savers 0.2% and charging borrowers 8% or more. This is not the behavior of an overcapitalized industry, but one that is desperate for addition capital.

fsda Posted On 8/6/2009 2:50:02 PM

Erich - Hmmm ... well, actually it has been six months, perhaps a day or two short of 6 months since Geithner's horrible February 10 coming out speech, when he announced his stress test idea. So, put your door back on its hinges.

G-Ice Posted On 8/6/2009 2:59:33 PM

Slow your roll Erich! It has been six months. The stress test started with the 12/31/08 balance sheet. You need to lay off the pipe and calm down a bit.

mark despot Posted On 8/6/2009 3:09:18 PM

Do you think many Banks may have losses they have not recognized? Do you think Mrs. Meredith Whitney is in error or inaccurate with her fiscal accessments of the major Banks? The FDIC has closed > 64 Banks in the 1st half of 2009. Do you think the continued rise of forclosures and falling home prices indicate Bank balancesheets' are improving? America's consumers are not spending and many businesses and associated properties are losing value which does hit Bank balance sheets

RayBenz Posted On 8/6/2009 3:48:48 PM

Joel: You're FOS. A bank's lending activities is a combination of the number of available prudent loan opportunites + the demand for credit. There is very little demand for credit. Consumers are delevereging and businesses are so scared of Obama's anti-business policies that they are hoarding cash on their balance sheets and not expanding----this is why it's going to be a jobless economy. Do you read the papers you idiot? We in banking can't push a rope you knucklehead. Capital has nothing to do with it right now. Tom is right; we are overcapitalized out the waazoo, aren't being permitted to buyback stock, issue dividends or pay back TARP.

anon Posted On 8/6/2009 4:01:40 PM

Thanks, Tom. What about off-balance sheet risk...maybe the treasury was trying to take that into account when they were being over-conservative?

dave Posted On 8/7/2009 1:50:54 AM

Tom, ditto previous post about off-balance sheet risks - any more SIVs, etc? how about commercial loans losses? what's the worst-case for banks? housing prime loans & jumbo loans?

Erich Riesenberg Posted On 8/7/2009 9:06:53 AM

I think most coherent people would consider the results since the tests were released as the relevant measuring point, and even it had been six months it would be irrelevant. The tests are supposed to measure ability to withstand adverse conditions over years, not weeks. I realize Tom missed the entire bear market and hasn't had the courage to criticize the bank bailouts, and eventually he will be right, like a broken clock.

Matt Snowling Posted On 8/7/2009 2:42:19 PM

Hey Tom - FMD is up $0.15 today!!!!

mopedman Posted On 8/8/2009 4:00:36 PM

There is a fifth dimension, beyond that which is known to man. It is a dimension as vast as space and as timeless as infinity. It affects all mankind from the commissar to his honest counterpart, from the billionaire to the beggar. The main rule one needs to learn here is how wonderfully profitable disasters can be but only if you can effectively and, (Your fear make air really stink) manage them. This place is called 'The Stock Market Zone' and when it works things are woefully slow here so then it's about time for you to deal with your imagination yet again. Most will forget what works. You buy when you see blood on the streets, even if some of the blood is your own. There are also politicians (Does it get worse than in the US?) in the mix. Well 'ol chaps', this time I'm sticking with it but I'm now staying closer to me roots for the long-term plays in things such as Lloyds and Barclays (Her Majesty's version of JPM and Goldman Sachs perhaps and what has just happened here?) and of course in honor of the great potato famine that brought us to this more honest place, IRE. Let's see oil goes up the dollar goes down...I wonder what this would do. I think a really good sign for LYG is as it started to rise DB quickly downgraded or another likelihood is what they say doesn't matter at all anymore. I'm ready for a spot of hot tea right now. Fish and chips is starting to sound good for dinner. Cheerio mates!

Publius Posted On 8/18/2009 2:58:23 PM

You should really moderate these comments. But what happened to the "Nationalize Now! Nationalize them all!" crowd? I remember Roubini spouting off as to what C's provision should be in the second quarter. When did that guy start analyzing bank balance sheets? Seriously, it now looks like the severe stress test was severe enough. But if forcing PNC to raise 300mm at a bad time was the price they had to pay for National City, so be it. Nobody forced them to buy NCC. Nor did the Fed force BAC to buy MER. We are beset by agency problems. Owner capitalism has been replaced by agent capitalism, without a concomitant change in the rules of governance. So you have lemon socialists and statists squaring off over too-big-to-fail. It would make good Kibuki theater. You have a point: the stress tests were a waste of time. I mean, why weren't they incorporated into unified exams from the beginning? Where have these guys been. But tail risk can overwhelm the best VaR model, and there *are* dragons outside the curve. Someone from Goldman said that the financial crisis was a 25-sigma event. Doesn't somebody from Goldman edit these things? That would be once every million years. So why did we have a similar event in 1931? Knightian uncertainty rules inside the firm as well, I guess. At least Goldman didn't have to raise capital.
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