Geithner stress test sermons lack moral force
By Rob Cox and Richard Beales
Timothy Geithner can’t put his money where his mouth is. The U.S. Treasury secretary, who is joining fellow G20 finance ministers this weekend in Busan, South Korea, has lately been urging other countries to conduct bank stress tests. But his credibility falls short in at least one important respect: future tests are absent from America’s financial reforms.
Geithner’s message is spot on. Subjecting America’s 19 biggest banks to tough scenario analyses, disclosing the results and requiring subsequent capital raises helped draw a line under the financial panic. The exercise gave comfort to customers and regulators about the health of the banking system and led to banks adding nearly $200 billion in new capital.
U.S. bank stocks, as measured by the KBW Bank Index, haven’t looked back since the results of the tests were revealed just over a year ago. Even after recent market tumbles, the index is up 15 percent. By contrast, a comparable index of European bank stocks compiled by Dow Jones is down about 3 percent. Worries persist about the adequacy of their capital cushions, especially with Greece’s finances in such a mess.
There are big institutional obstacles to replicating the stress tests in Europe. There’s no central regulator like the Federal Reserve, which oversaw the U.S. tests. Nor is there a reservoir of cash — like the U.S. Troubled Asset Relief Program — to backstop any banks that fail to attract private capital.
Beyond these problems with Geithner’s exhortations, however, lies a potentially greater sticking point. Neither of the two versions of reform legislation in the United States now being reconciled requires last year’s stress tests of U.S. banks to be repeated. G20 colleagues may suspect America doesn’t want another dose of the medicine it’s prescribing.
Meanwhile, the G20’s broader good intentions to coordinate regulation across borders are looking flaky, too. From the U.S. plan to make it hard for banks to engage in proprietary trading to the European Union’s tougher regulation of hedge funds and Germany’s ban on certain kinds of short-selling, there’s plenty of unilateralism in evidence. Put it all together, and Geithner’s stress test sermons may lack the moral force to stir his listeners.