The fact that the stress tests took place at all was an admission of regulatory failure. Financial firms are subject to oversight, most important, of safety and soundness, on an ongoing basis. The notion that a one-shot effort is a substitute for insufficient supervision is spurious.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury used a ‘one size fits all’ stress test that grossly understated derivatives risk — the primary risk that the largest banks face.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

... if the number exceeds $200 billion, it will mean the regulators truly are worried about the system. If we get a number smaller than $100 billion, it will be a positive sign that things are better than they have looked, since there is political room to go above $100 billion.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

... the “stress” scenario used by the government turns out to be a mild and short-lived downturn, so the tests were effectively designed to allow everyone to pass. Actual official outcomes for each bank are the result of complicated closed door negotiations, and at the bank level all we have learned is who has more or less political power.

Alex J. Pollock, a fellow at the American Enterprise Institute, spent 35 years in banking, including 12 years as chief executive of the Federal Home Loan Bank of Chicago.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The stress tests have definitely achieved their principal purpose, which was, as I see it, to show that the Administration had a plan and was doing something: “Our plan is to have stress tests, and we are carrying them out.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Booms are full of overoptimism, busts of overpessimism. It may be that the stress tests are part of a transition to a helpful, less pessimistic stage.