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Bank Stress Tests: The Government Isn't Going Far Enough

Posted by: Mara Der Hovanesian on June 09

There are a couple of things that strike me as odd and even disturbing about the new congressional oversight report on the recent bank stress tests.

First, the “adverse scenario” on these 19 banks isn’t adverse enough. Didn’t we already know that? There were plenty of folks raising the specter of double-digit unemployment long ago. Only now that unemployment has climbed to a rate of 9.4% is the government suddenly saying it has “serious concerns” that perhaps the tests weren’t rigorous enough.

There’s also the massive problem of commercial real estate assets and loans—none of which have been calculated into the mix. Banks hold some $1 trillion of these loans, the report notes. Research out of Deutsche Bank shows that the majority of losses on these loans (never mind the derivatives and securities created off of them) won’t show up for another few years. The default rate of U.S. commercial real estate bank loans has already reached its highest level in 15 years and is not expected to peak until 2011, according to another new report by Real Estate Econometrics.

Two very respectable professors helped Congress put together the recent report and gave their blessing on the “solidly designed working model” of the stress tests, backing them up with the usual econometric hieroglyphics and mathematical models. The report recommends that banks and their regulators continue the stress tests. That seems reasonable: No doubt that we want to know if our banks are healthy and able to withstand tough economic headwinds.

But we also want to know if they are getting into trouble enough to take down the whole system. The 168-page report by the Congressional Oversight Panel reminds us that our regulators are still not able to assess that properly. The ability to understand the interconnectivity among banks and the risk they present, especially in the derivatives market, is still a big fat unknown. And the regulators and mathematical geniuses have yet to figure out a way to monitor or measure that risk.

Seems we’re still flying in the wind.

Reader Comments


June 9, 2009 02:51 PM


Dan B

June 9, 2009 03:05 PM

Are we Dumb or Dumber??? congressional oversite is worthless. Just ask Barney Frank how are freddie mac and fanie may.
How did we get in this position of MAKING banks lend money to sub primes??? ask Barney Frank and some other Demos.
and the straw that brole the camels back was the price of gas... Do you remember???
LOL I am seeing an ad for Harvard Business School as I type. I have too wonder when was the last time a congressman filled up his tank of gas with his own money!Oh well what do I know I am just a republican small business owner that might close up. People can not afford gas and hurricane shutters. Maybe Obama will save my CO OR i can go work for the govt... nah

Dan B

June 9, 2009 03:08 PM

how many of you know that sub prime refers to the people who have the mortgage not the mortgage??


June 11, 2009 03:16 PM

There is great irony in Greenspan's so-called sophisticated parties being unable to establish a credible model of risk for the very instruments they invented, bought and sold. If I had the power, I would give them 2 choices: either work out a transparent risk model, or deny their marketing to any player who represents individuals with less than $1 million. No pension fund or mutual fund, nor any state or local government monies should have been allowed to partake, because none of the individuals represented could afford the risk that was supposed to have been limited to high net worth parties.

Thank you for your interest. This blog is no longer active.



BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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