Stressed out?

April 21, 2009

Trying to second guess reaction to news during this financial crisis has been a fraught exercise and the U.S. Treasury may have a few advisers playing game theory to assess the impact of results from bank stress tests.

The tests are an attempt to determine which banks can survive more trouble, and who can’t. And how big any balance sheet holes might be. The results are due out on May 4.

If the results look too good, the process will look like a whitewash. Too negative, and it will destabilise still-jumpy markets. Yet showing up problems at one or a few banks could hang them out to dry.

The plan may have been to keep results secret, but that’s unrealistic. Shares in Britain’s Barclays soared last month when its regulator gave it an all-clear. That boosted all the UK sector, but then Barclays was almost alone in the spotlight — its rivals had either already been bailed out or had comfortable capital positions.

In the U.S., there are 19 banks to handle. It could be a PR nightmare and maybe one policymakers should have seen coming. Tim Geithner may end up on the back foot, just as he tried to get ahead of the crisis.

Or he may just opt to play hardball with the weaker banks. At least a transparent process will remove uncertainty from the stronger names.

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