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Bank Stress Tests: Threading the Needle

Posted by Larry Doyle on April 19, 2009 12:44 PM |

For those involved in assessing the solvency of our domestic banking system, the prospects of releasing the results of the Bank Stress Tests are frightening. How do Secretary Geithner, Fed chair Bernanke, regulators, and President Obama himself maintain credibility with the markets while simultaneously growing confidence in the public? 

As Bloomberg reports, Bank Regulators Clash Over U.S. Stress-Tests Endgame.  Secretary Geithner clearly was trying to buy time when he proposed the Bank Stress Test model. The day of reckoning will soon be upon us. The administration will release the model used on April 24 and the results on May 4th. However, there are enormous conflicts within the administration and the regulatory community as to how to release the information and how much information to release.

As Bloomberg highlights, 

The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests of 19 U.S. banks, with some officials concerned at potential damage to weaker institutions.

With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements, people familiar with the matter said. While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicized, the Treasury is pushing for broader disclosure.

The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.

“There are plenty of ways to go wrong here,” said Wayne Abernathy, executive vice president of the American Bankers Association in Washington. “It might have sounded good at the time, but now looking back, it has far more risk than benefit.” 

What will come of this? The pressure from all corners is increasing on Geithner. Can he snatch victory from what may appear to be a lose-lose situation? Can he somehow or other get the results forestalled and maintain credibility? Can he keep the various constituencies placated? Truly, he needs to “thread the needle.”

Listen to NQR’s Sense on Cents with Larry Doyle this evening from 8-9 p.m. as I discuss how I think Secretary Geithner will try to thread the needle.


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