The Congressional Oversight Panel announced in a report this morning that it feels more bank stress tests are needed, especially if unemployment rates continue to rise. The group believes that the stress tests should be repeated periodically as long as banks continue to hold toxic assets. The panel used a risk-modeling approach that is described as "reasonable and conservative," but added that it is impossible for an outside party to mirror the loss projections that form the core of the stress tests. The group noted that the "more adverse scenario" assumption for the U.S. unemployment rate in the tests has nearly been met in 2009. The yearly average for the unemployment rate stands at 8.5%, which isn't far from the 8.9% assumed in the first round of stress tests. The group recommended that the "Treasury publicly track the status of its stress test macro-economic assumptions (unemployment, GDP, and housing prices) and repeat the stress test if the adverse scenario assumptions have been exceeded."
The report's release coincides with the Treasury preparing to announce which banks will be allowed to repay TARP money. Nine of the 19 banks have met the repayment conditions set by the Federal Reserve, which include selling new shares, issuing debt without a government guarantee and resolving the deficiencies identified during the stress tests.
The panel reported that the stress test's results had a positive effect on the market and investor confidence, but it cautioned against assigning too much value to the stress test results.
I believe that continued stress tests should be performed, as long as extenuating circumstances persist. However, it certainly seems that some experts believe unemployment will continue to worsen, with Rupert Murdoch stating the belief that unemployment will reach 11%. If this is the case, the banks will find themselves under a great deal of unexpected stress.
Perhaps another round of stress tests would be good for the market; just look at what has happened since May 7, when the test results were released. The market has done well, and another round of tests with worse circumstances could have the same impact. If some still believe that the worst isn't over, then maybe more tests would calm their nerves. The only way to know is to perform more tests.
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Reader Comments (Page 1 of 1)
6-10-2009 @ 8:47AM
dan said...
Stock Symbol- HOME, needs to be investigated soon there management team is doing alot of hidden scrabbling behind closed doors. It looks like there will be more commerical loans failing because of there upper management not working with there clients. All customers need to cancel there acct. and move them to better banking companies. I have done this already.