Why didn’t the WSJ stress-test the big banks?

May 19, 2009

The WSJ has a very pretty interactive graphic, showing what’s likely to happen to the capital of 940 small and medium-sized banks if the “adverse” scenario in the government’s stress test comes to pass. Essentially, using public information, the Journal tried to replicate the stress tests across the industry as a whole.

I’m disappointed by this, however:

The 19 big banks that underwent a Fed stress test weren’t included in the Journal’s calculations….

The calculations don’t reflect any efforts made by individual banks since the start of this year to shore up their capital, such as shedding assets or cutting costs.

Obviously an exercise in crunching the numbers of 940 banks using public information is never going to be as detailed or granular as the stress tests were. But the stress tests put great store in efforts to shore up capital, and it’s entirely possible that those efforts might have made a significant difference. On the other hand, it’s possible they wouldn’t.

So I would really have liked it had the WSJ decided to increase the number of banks they did this exercise on from 940 to 959. It wouldn’t have been all that much in the way of extra work, and then we could see very clearly how the WSJ’s approximation of the stress tests compares to the real thing. Does the WSJ methodology produce similar numbers to the actual stress tests or not? If they printed the results from the 19 big banks, we could see for ourselves. Instead, they made a conscious decision not to run the numbers on the 19 big banks, thereby making it much harder to tell how reliable the numbers are. Weird.

Update: DollarEd puts it more sharply:

Obviously, the WSJ had sufficient data and a sound enough methodology that they were confident enough to apply it against 940 banks and publish the results. So, it would be very valuable, both to validate the WSJ’s work and to learn more about the Big Banks, to apply it to those 19 Big Banks. After all, they comprise 58% or something like that of the banking sector, so to not extend the coverage of the article really shifts the article from National News to some sort of stock picking (or dumping) exercise.

DollarEd reckons this is a function of the WSJ being essentially captured by the big banks. Is there another explanation?


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