Spring Break
Upping the ante in the game to save banks
Sanjai Tripathi
Issue date: 5/12/09 Section: Forum
All seems calm and right in the markets this week after the banks mostly passed the Federal Reserve's "stress test."
The markets and the economy are breathing a sigh of relief over the news. Let's hope this sentiment proves to be correct.
Banks need the confidence of investors to get the funding they need to keep chugging along, and the economy needs banks running well in order to bounce back from this economic downturn.
The Federal Reserve came out with the stress test idea to try to restore that confidence. It was supposed to be an honest assessment of the health of banks.
It's a "what if" game. The Fed asked: What if the economy got moderately worse than expected, and all the questionable assets the banks are still holding had to be marked down - how would the bank balance sheets then look?
If a bank could endure that stress and still have a positive value even after taking those losses without breaking, it would be deemed healthy.
If the bank went negative, it would be required to build up more capital or face the possible consequence of nationalization and liquidation at the hands of federal regulators.
With this test, the Fed attempted to show the markets that it was willing to take a real hard look at the banks and declare once and for all that those "zombies" that were limping along inadequately capitalized, neither dead nor truly living, would be put to sleep.
That is fine in principle, but many observers are questioning both the standards used and the very credibility of the Federal Reserve in applying the stress tests.
For one thing, reports are coming out that the standards applied were altered when the banks complained about them being initially too strict. That is cause for concern because the stress test was supposed to be an independent, objective and hard look at bank health, not a negotiation.
In the end, the "worse" scenario wasn't really as bad as things might get, the benchmark for asset write-downs has been received by market watchers as overly optimistic and, surprisingly, none of the major banks has been deemed fundamentally unsound.
The markets and the economy are breathing a sigh of relief over the news. Let's hope this sentiment proves to be correct.
Banks need the confidence of investors to get the funding they need to keep chugging along, and the economy needs banks running well in order to bounce back from this economic downturn.
The Federal Reserve came out with the stress test idea to try to restore that confidence. It was supposed to be an honest assessment of the health of banks.
It's a "what if" game. The Fed asked: What if the economy got moderately worse than expected, and all the questionable assets the banks are still holding had to be marked down - how would the bank balance sheets then look?
If a bank could endure that stress and still have a positive value even after taking those losses without breaking, it would be deemed healthy.
If the bank went negative, it would be required to build up more capital or face the possible consequence of nationalization and liquidation at the hands of federal regulators.
With this test, the Fed attempted to show the markets that it was willing to take a real hard look at the banks and declare once and for all that those "zombies" that were limping along inadequately capitalized, neither dead nor truly living, would be put to sleep.
That is fine in principle, but many observers are questioning both the standards used and the very credibility of the Federal Reserve in applying the stress tests.
For one thing, reports are coming out that the standards applied were altered when the banks complained about them being initially too strict. That is cause for concern because the stress test was supposed to be an independent, objective and hard look at bank health, not a negotiation.
In the end, the "worse" scenario wasn't really as bad as things might get, the benchmark for asset write-downs has been received by market watchers as overly optimistic and, surprisingly, none of the major banks has been deemed fundamentally unsound.
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