On stress test leakage

Paul Krugman ponders in his post today about who could be leaking (and why!) some info with regard to the stress test results, inspired by some others who put the question on the table.  So far, Citi, Bank of America and Wells Fargo have been reported to need capital boost.  And these are the big ones perceived to be in most trouble.  Yves of naked capitalism sees this leakage merely as a “predictor”, to see how the markets would react to some X amount of capital reported to be needed by banks.  That makes sense to me. But it  somehow worries me, too.

Point 1: If this leakage is indeed serving as a gauge of investor sentiment/reaction to the capital “needed” by banks, then it means there is a bit of disregard to the real results of the tests. Having to modify what is acceptable to investor means simply putting out a “requirement” to the banks that “failed” just to meet investor expectations. But how much cheer it would create, I don’t know.

Point 2: The negotiations/debate ongoing between banks and the regulators is another sign that no one is sticking to the results except those who did pass the test with flying colors (if anyone did reach that level, say Goldman Sachs and JP Morgan).  That sounds to me like a manipulation of result.  Considering the assumptions behind the tests are already questionable, having to make things better (which is definitely the only path banks want follow) render the whole thing more unreliable.

Point 3: As the big banks hold the bigger bargaining power, what might end up happening is having many ailing small banks boost its capital to the level necessary while the more at risk big banks continue to exist with the cross on their shoulders.  Sooner or later, they will fall. Perhaps harder than if they went straight to revealing the real thing.

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One response to “On stress test leakage

  1. Let’s face it, these “stress tests” are extremely subjective and based upon many assumptions. Surely the leaking of info will help mold the results.

    Just some thoughts…

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