How important are stress tests for banks? After all, much of what comes from the regulators in Washington these days can be taken with a grain of salt after the politics are removed.
Stress tests are actually a combination of individual financial evaluations. They can entail bank loss estimates, measured as percentages of holdings on first-lien mortgages, and second-lien mortgages, or credit cards, or commercial real estate loans. Estimated bank earnings are also considered.
Added to this hodgepodge of risk percentages is the reserve status of each bank. The level of what is referred to as Tier 1 capital is important. This includes common and preferred shares, preferably equal to 4% of what is called risk-weighted assets. Sometimes 4% may be considered too low.
To complicate matters more, some unrealized losses on assets could become losses in the future, so the Tier 1 weightings may have to be adjusted. Obviously, stress tests are not fixed so their results can give varying interpretations.
That is the basic fallacy behind stress test talk, or regulation upon regulation imposition from Washington. It is too much about subjective, theoretical nothingness.
And it is the reason why the administration is running what was a minor recession into a major depression. Bank assets were “marked to market” daily when asset values were hard to determine, during the Great Financial Meltdown.
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