As many of you probably heard, the stress test results of nation’s 19 largest banks will be announced next Thursday. So what exactly is the purpose of a stress test? Basically they are suppose to check each bank’s financial health. For example, techniques are used on a company’s asset and liability portfolios to determine their reactions to different financial situations, which are all hypothetical scenarios (changes can include interest rates, lending requirements, etc.). The test will then determine how the portfolio will fare during the situation and analyze the strengths and weaknesses of the institutions.
Results will ensure whether the company has enough cash on hand to undertake a continued economic crisis. Banks without sufficient capital could get more federal funds to meet their needs so that they can withstand this recession. The release date was actually suppose to be earlier this week but the Federal Reserve ordered banks to keep their test results a secret. Obviously, this had caused anger to investors because we all want to stay away from weak banks.
One side of the spectrum: (the bad)
William Black, a former senior bank regulator, is extremely critical of Timothy Geither, calling him a “failed regulator” who is “adding to failed policy” by not allowing “banks that really need desperately to be closed” to fail. Black also says that the stress test is viewed as part of Geithner’s toxic debt plan, which he calls “an enormous taxpayer subsidy for people who caused the problem.”
Another side of the spectrum: (the good)
“The purpose of this program is to prevent panics, not cause them,” an unnamed senior official told the Times. “And it’s becoming clearer that we and the banks are going to have to explain clearly where each bank falls in the spectrum.”
