“Bank Regulators Clash Over Endgame”

The bank stress tests are nearly complete, and there’s apparently a debate over what to do with the stress test information on individual banks. Shouldn’t Geithner have known what they were going to do with the stress test information before announcing the program in February? Or maybe figured out what those plans were over the last two months as they’ve been conducting the tests? Did they have plans and then realize they hadn’t fully thought them through? Didn’t we learn the dangers of going to battle without thinking carefully about the endgame and planning accordingly?This exercise was supposed to build confidence in the system, but that doesn’t happen when you put a policy in place before thinking it through thoroughly. Instead of testing banks, it’s ending up as a test of Geithner’s credibility as a policymaker, and instead of building confidence, it threatens to undermine it:

Bank Regulators Clash Over Endgame of U.S. Bank Stress Tests, by Robert Schmidt, Bloomberg: The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests of 19 U.S. banks, with some officials concerned at potential damage to weaker institutions.

With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements… While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicized, the Treasury is pushing for broader disclosure.

The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers. …

Fed officials have pushed for the release of a white paper laying out the methodology of the assessments in an effort to bolster their credibility. … A statement on the methods is scheduled for release April 24. … The 19 companies may get preliminary results as soon as April 24, a person briefed on the matter said.

Regulators, all of which regularly administer exams to the lenders they oversee, have privately expressed concern about the tests and whether they will be effective, the two people said.

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said.

Geithner has said he crafted the stress test program in an effort to provide more transparency about the health of banks’ balance sheets. … How the market handles the results is a chief worry of banks and regulators… Banking lawyers and industry officials said that the Treasury needs to be very clear with the public about the reviews, which by their design test events that may not happen. …

Originally published at the Economist’s View and reproduced here with the author’s permission.

2 Responses to "“Bank Regulators Clash Over Endgame”"

  1. Jean-Philippe Thiébaud   April 18, 2009 at 11:56 am

    Well, I want to underline a few facts about the stress tests :1. Allthough a regulator is supposed to have saied to the New York Times that the 19 banks all passed the tests, no one can know it for sure.2. There are reasons to think that tests will not be passed, at least by all banks.For instance, the Wells Fargo CEO saied that these stress tests were “asinine”.The question is : did he say that because Wells Fargo doesn’t pass the test?Goldman Sachs is going to raise capital before the stress tests results are made public, officially to reimburse the Treasury funds after the tests results are publicly known. Indeed, just their agenda shows that they fear the test will reveal a capital shortage which they will face thanks to the capital raised before the test results. Why do they raise their capital before? Will the test results trigger declines in banks shares prices?3. I also find it quite surprising that anything has to be kept so secret by banks untill that date. Is that because if some banks were to reveal good news, the other ones would be penalized if they wouldn’t say Me too I can pass the test? Or is it because all the news that would be made public could disappoint markets and trigger a new bear rally?4. Oh yes, I don’t forget…If the banks losses were to reach 3 or more trillion dollars as Roubini and the IMF predict, the stress test could also reveal the US banks’insolvency.That is mere speculation…but I will surely gamble bearish before the tests.

  2. Guest   April 26, 2009 at 7:43 pm

    It really depends on their motives for releasing specific data, FDIC is a given, Comptrollers motives are a little cloudy.I do agree, does the Treasury Secretary have a plan on what to do with the information? If not they he should request an extension of the date of publication. And he should’nt be forced to have a crunch time ticking clock on issues as immense as these. Good decisions do take time to develop.I am not to worried about Wall Street, their emotions go up and down with an tid bit of information, the cause of the concern is the actual effects to the economic infrastructure, if large banks are subject to windfalls.What people really want to see is a plan of action, that is the purpose for collecting information, I agree with you on this part.