Posted by: Armel | April 25, 2009

STRESS TESTING=NO STRESS !

 

stress-test

SHOULD WE BELIEVE IN THE RESULTS OF THE STRESS TESTS ?

The so called “Stress Tests” were supposed to check the stability of major Financial Institutions (F.I) in the face of a deepening domestic crisis. This was an exercise where dark scenarios borrowed from economists and their future projections data, were used to estimate the potential losses these financial institution might incur. Based on those results, the regulators were going to either require more capital from the FI, provide further access to the Tarp or extend their access to different  short term funding windows.

After all the hype about what to expect, the results just proved to be as illogical as the publication of the report on starting such a process. If the intent was to test the viability of F.I in the face of pressure from shareholders and short sellers, it means that the process couldn’t possibly be legitimate since the last thing the regulators wanted was to contribute to another Bear Stearns.

Did the street actually hoped that the Regulators would come out and commit systemic suicide by exposing the risk and potential losses  Financial Institutions, might encounter? Doing so would have defeated the entire purpose of all the programs launched to mitigate their exposure to systemic risk.

In the end, the published results will be full of double-entendre and provide alternatives in the place of worries and warnings. And the reasons why it wouldn’t be otherwise are obvious: We don’t need more STRESS !

Armel Njeunou

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