Friday, July 09, 2010

Bank stress tests are a Catch 22

Brilliant analysis from Tracy Corrigan of the Telegraph, linked here! Two quotes giving the flavour: Stress-tests are the Catch-22 of banking supervision. Their purpose is to demonstrate that banks are safe. To do so, the tests must be rigorous. Yet because their purpose is to bolster confidence, their rigour is bound to be doubted. Unless the tests reveal that the banks are in a terrible mess. In that case, the stringency of the tests would be proven, but the primary mission of reassurance would have failed horribly. ...... Can we trust this batch of tests any more than the models which demonstrated AAA-rated sub-prime mortgage-backed securities were safe as houses? According to Alistair Ryan of UBS: "What we are going to get from the stress tests is a group of regulators, who already have been determining whether banks are appropriately capitalised - based on certain scenarios which they run all the time anyway - telling us that on the basis of these same scenarios, they remain confident." And if that isn't what we get, surely regulators should have mentioned it before now.



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