Word: stressful
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Already, the IMF has recommended that European regulators follow the U.S.'s lead and run stress tests on their banks. And there are hints from the Federal Reserve that at least some aspects of the stress tests will become part of the ongoing regulatory system. Fed Chairman Ben Bernanke has said that the stress tests were "an enlightening exercise that will improve the tool kit we use to help ensure the safety and soundness not just of individual firms but of the financial system more broadly...
What was different about the recent stress tests was that unlike the usual bank-by-bank examinations, the stress tests looked at all the banks as a group. By aggregating the data, the Fed presumably could make better estimates of what would be the loan losses at the individual banks. The stress tests also looked out two years, instead of the usual one, as regulators gauged if banks could weather a worsening of the economy - where the stress in the name comes from - and not just whether they had enough capital to pay for current losses. Most importantly, the results...
...Federal Reserve says the stress tests were a one-time thing and it has no plans to do them again. One problem with regularly repeating the tests is that they are expensive and time-consuming. The current one took 150 bank examiners six weeks to complete. Bert Ely, a bank-industry consultant, says bank executives don't want the stress tests to return. While Ely says he does believe the stress tests have influenced how regulators will view banks in the future, he's not sure he sees the point in them. "This is the government trying to steer business...
...biggest criticism of the stress tests has been that they were not stressful enough. For instance, the government's "adverse case" scenario assumed an unemployment rate of 10.3%. But some economists are already predicting that unemployment will reach that level - or worse - in this recession. So the government's adverse scenario seems to be the actual...
Still proponents of doing the stress tests say there is an easy way to remedy that problem: do the tests again. As the economy worsens, you could apply more adverse economic conditions to see if the banks hold up. If the economy improves, revised stress tests might also tell you when it is time for the government to pull back the federal assistance it has lent the banks...