on stress tests...

Posted on Wednesday, April 22, 2009

These things being called "test" are starting to sound more and more like college sorority hazing.

Unlike a test would measure skills learned, these are putting banks under a fabricated (we hope) seriies of worst case scenarios and watching to see if they "break."

And talk about secracy...its like being blackballed and not even knowing by who or for waht. Until now (and maybe even now) we didnt even know what they test would be!

So what do we know now? Regulaotrs are using estimate of likely loan losses...ilkely according to who? The Test assumes a 10.3 % unemployment rate by year end 2010 and requires banks to be able to withstand 2 year losses of up to 8.5% on first mortgage portfolios and 11% on HELOCs, 8% on commercial and industrial loans and 12% on commercail real estat eloans and 20% on credit cards.

Granted criterai for deciding who is and is not well enough funded is important. On th eother hand, there are a whole lot of assumptions here that may put banks on the right or wrong side of the passing grade and never prove to the true.

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