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No more Stress Tests Please! Can we have more Bank Disclosures?

March 12, 2013

Many moons ago, we had expressed skepticim at the Federal Reserve’s bank stress tests (https://crediteye.wordpress.com/2011/11/29/the-feds-new-bank-stress-test/). The latest stress test just confirms that these stress tests are pointless Keynesian hole digging. The stress tests are based on a scenario prevalent during the credit crisis of 2008. The next credit crisis will be very different. Assets that were most liquid during the last crisis (US government securities) will not be so during the next crisis. To satisfy various liquidity requirements, banks have accumulated government securities, which they will all try to sell at the same time, thus making them illiquid.

How much better it is to force the banks to disclose far more on the true state of their loan, trading and the investment books? Market players can then conduct their own stress tests under scenarios which they deem likely. Based on actions of informed market players, through the share price, a quick feedback is provided to bank management. Without these disclosures, big bank stock valuation of the brokerage houses is a wierd guess at best and fraudulent at worst.

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From → Credit Analysis

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