Worthless Stress Standards For Banks

The regulators are at it again, in attempting to bulk up bank capital in the event of future financial meltdowns.

How important are these so-called stress tests for banks anyway? Much of what comes from the regulators in Washington can be taken with a grain of salt after the politics are removed. Particularly with passage of last year’s Dodd-Frank Act.

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 considered.

Added to the hodgepodge of risk percentages is the reserve status of each bank. The level of what is referred to as Tier 1 capital is important.

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 what I refer to as the Great Financial Meltdown. ( See the Earl J. Weinreb NewsHole® comments.)

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