The Corner

Stressing Points

Here are eight things to think about when considering the stress tests conducted by banking regulators:

  1. By using common standards to examine the 19 largest bank holding companies, regulators, and investors should now have a better picture of the risks to the financial system. This information and transparency are critically important.
  2. The test results should give useful information about the relative health of these firms, but there is still a risk of a systemic error in the assumptions. The biggest risk is that the pessimistic scenario wasn’t pessimistic enough, meaning most everyone would need even more capital. So while we learn a lot from these tests, we should not assume that we know everything we need to know.
  3. Banks have until June 8 to develop a capital raise plan, and until November 9 to raise the capital.
  4. The “payback guidelines” released Wednesday look good. Bank holding companies have to demonstrate that they are not a risk to the system (and the taxpayer), and that they can raise capital on their own. The new rules require the BHC demonstrate that it has “balance sheet capacity sufficient to continue prudent lending to meet the credit needs of the economy,” but do not impose specific lending requirements or targets. This was the risk implied by earlier comments from senior administration official, which is happily absent.
  5. It would be good to make AIG, Fannie Mae, and Freddie Mac go through the same stress tests to provide investors, taxpayers, and regulators with an apples-to-apples comparison.
  6. The administration seems to bounce back and forth between emphasizing building a strong capital base and helping BHC’s get rid of toxic assets. I think the capital cushion is more important.
  7. $34 B more for Bank of America is a big number.
  8. I continue to be confused about why the administration is so confident they will not need to ask Congress for more TARP money, especially if they intend to use a lot of cash to prevent GM from liquidating.

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