Bank Stress Tests

After stressing all of us out, the 19 largest banks had to undergo a stress test of their own. On 5/7/09, the Federal Reserve (Fed) released the results of their several month stress tests on the 19 largest banks in the country. These tests project certain levels of unemployment, loan delinquency, falling asset values and determine whether banks have the capital cushion to withstand the losses.

The stress test used a 9.5% unemployment rate, which some felt was too low. Weekly unemployment figures released 5/8/09 showed an 8.9% rate and it is widely believed that the rate will go over 10%. The U6 unemployment rate, which includes people who have given up looking for a job and those who have taken part time employment because they couldn’t find full time work, is estimated by the Fed at 15.6%. This figure is a more accurate indicator of the true impact of unemployment on the work force and the economy.

In April the Fed released their preliminary stress test results to the affected banks. Some bank executives were furious, claiming that the Fed was being too severe. The final figures released this past Thursday were the negotiated figures.

The capital deficit of Citigroup was originally estimated at $35B. The revised figure was $5B. Heck of a negotiation there.

In a front page WSJ article 5/9/09, an analyst calculated that the capital shortage of the 19 banks would have been $143B if the Fed’s revised results had accounted for unrealized losses. Those revised results required that the banks add only $75B to the capital on their balance sheets to protect themselves against future losses over the next two years.

As long as unemployment doesn’t get too much worse and real estate prices don’t decline much more, the banks should be in adequate shape.

These financial stress tests has been like the treadmill test that a patient undergoes to test the health of their heart. Perhaps we should take an example from the banks and negotiate with our doctors over the condition of the treadmill test. “According to your treadmill test, doc, I gotta lay off steaks and get more exercise. But you tested me while running. Now, how often do I run? Rarely. Your test is unrealistic. What if we did the test with walking fast instead of running?” Good luck with that.

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