Geithner stress test sermons lack moral force

June 3, 2010

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.

Comments

Hello all;

So, under One World Government (and Saudi Arabia is already looking into world peace through one World Government; with it’s associated officially state approved, fundamental, orthodox religion) with one World Religion; it sounds like we need a new “World Bank”

Could Canada volunteer? What would be in it for us? Who cares about what’s in it for you . . . everybody already knows that . . . What is in it for us?

What is in it for me?

-Brian Leslie Engler

Posted by amunattached | Report as abusive
 

I think you miss the point. The US SCAP stress-tests were “fit for purpose.” Banks had become uninvestable. Investors did not know the size of the hole or the actions the regulators would take. The stress-tests, through a credible process, aggregate losses in line with industry expectations, and differentiated results by bank provided the market with information that allowed them to assess the risks of investment. That, combined with the US Treasuries backstop, insured the solvency of the US banking system.

The routine conduct and publication of stress tests for normally healthy banks would provide the market with information, but would do so at the expense of independent investor judgment (just as investors over-relied on the ratings agencies).

The key for the europeans in the conduct of an exercise similar to the US SCAP would be the provision of a credible backstop, and overcoming the supervisory reluctance to provide the market with information.

Posted by ExaminerCarter | Report as abusive
 

My opinion is that the “Stress Tests” were a complete sham. They depended on not breaching a 10%, ever changing, completley disingenuous unemployment rate. Guess what, you can spin it any way you want to, but you can’t make gold from hay.

Posted by SuperFact | Report as abusive
 

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