Well-known British economic writer Jeremy Warner said yesterday that the European stress tests were a sham:
European stress tests weren’t worth the paper they were written on …
Most of us said at the time that the tests had been designed for banks to pass, yet the fact is that it is now hard to believe they took place at all. Conditions have no where near deteriorated as far as the tests had assumed, yet still Allied Irish looks essentially bust. In other words the tests were a lie.
If the Irish stress tests were a sham, what about the rest of the eurozone?
American stress tests were a sham as well.
As I noted in October 2009:
- Time Magazine called the previous stress tests a “confidence game” and Geithner a “con man” for running them deceptively
- Paul Krugman called the stress tests a mere “self-esteem class” for banks that no bank would be allowed to fail
- Nouriel Roubini said the stress tests “fail the basic criterion of a reality check”
- William K. Black called them “a complete sham”
- FDIC head Sheila Bair didn’t believe they were credible [and former FDIC chair Isaac said that the stress tests backfired, and actually rattled markets]
- The stress tests were a P.R. stunt devised by the banks themselves
Indeed, the Federal Reserve itself has more or less admitted that the stress tests did not really measure solvency, saying:
“Even if the tests showed a bank needs more capital, that “is not a measure of the current solvency or viability of the firm”.
So what is the Fed’s bold new plan of attack for dealing with the deteriorating economy and the mortgage crisis?
More stress tests!
As the Wall Street Journal pointed out last week:
Fed Orders 2nd Round of Stress Tests
Officials Want Banks to Prove Viability in ‘Adverse’ Conditions; a Preface to Raising Dividend Levels
Concerns about the health of most large institutions have decreased, though investors remain nervous about the extent of losses banks face if they are required to repurchase flawed mortgages and mortgage-related investments. As part of its review, the Fed will require banks to assess their exposure to so-called “put-backs” of mortgages
Banks will also have to come up with their own set of metrics, including the ability to withstand “very severe” economic and financial-market events, the Fed said.