Stressing The “Stress Test” System

Maybe the initial “stress tests” of America’s 19 largest banks were flawed. Or, perhaps taking a single snapshot is not an adequate way to measure the ever-changing financial system. The Congressional Oversight Panel which monitors the effectiveness of the use of TARP funds does not believe that the government is doing enough to track the ongoing health of banks.

According to Bloomberg , the panel wants the Fed to release more data about the methodology and results of the “stress tests” so outside analysts can make judgments about their efficacy.

While the panel is probably right to want more opinions about the quality of the tests, its recommendation would turn the process of ranking bank balance sheets into a populist exercise with hundreds of analysts and thousands of shareholders opining on whether some banks should have been forced to take any money at all and whether others took too little. The results of the disorderly debates may take some of the power of the Fed and Treasury to regulate banks away. Bank shareholders, among others, may lobby to get the government to take back TARP money and reduce their risk of dilution. Outside agencies like the IMF may say that flaws in the testing process prove their contention that the financial system is still significantly under-capitalized. Congress may use the data to claim the the taxpayers’ money has not been properly spent.

The Congressional Oversight Panel is challenging what the Treasury and Fed believe is their inalienable rights to regulate the financial systems and impose what restrictions they believe are required to keep it solvent and running smoothly. Those rights, whether they are proper or not, are likely to be undermined by allowing a look behind the kimono.

Douglas A. McIntyre