Bank Stress Tests Are An Idiotic Idea

One of Tim Geithner's first "major initiatives" was to "stress test" the banks to see who might require more capital under extremely pessimistic hypothetical scenarios. As bank analyst Tom Brown explains, these stress tests: 1) are built on a false premise that banks are hoarding capital rather than lending, 2) are poorly explained by the administration by implying that a bank either "passes" or "fails," and 3) might actually cause bank failures for no good reason.

One of the biggest canards perpetrated by both the media and the administration is that the financial crisis is due to the "lack of regulation" and that the banking sector needs more "stress tests" to see how healthy they really are. Someone please remind these folks that the financial industry is arguably the most heavily regulated industry in the country. Bank regulators and examiners have been performing stress tests on a regular basis for decades, yet somehow this new Geithner/Obama sponsored stress test is supposed to really tell us which banks might fail if certain adverse conditions prevail over the next two years. If the examiners are useless, then let's do away with them and stop wasting money. How absurd.

But one thing is for sure - if the stress test scheduled to be released in May shows any bank to have even a slightly questionable future in the most pessimistic, dire scenario, the Feds might as well take the bank over today because the result will be a near-certain run on the bank within days. And the bank will have Geithner and Obama to thank for this brilliant idea.