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!