Stress tests for banks, suggested by regulators, are poorly designed because they’re composed of too many arbitrary factors; each may have weightings with only indirect relativity to each other.
Of the several factors, not one by itself is of predominant importance in reflecting bank safety. The ratio of doubtful residential mortgages to capital, for example, or commercial mortgages to capital, or types of capital, or what constitutes tier 1, or loan defaults, and effects of potential general unemployment, all add up to figures which become too vague,
Experts ought to seek decisive answers on which to base banking decisions. Financial officials and boards must now make subjective decisions to act upon such stress tests.
And they can be wrong, as they have been in the past, in dealing with financial meltdowns.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)
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