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, or 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 tweets.)
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