US Treasury’s bank stress test “meaningless”


The blog was never convinced by US Treasury Secretary Paulson’s efforts to manage the financial crisis. Its view was that Paulson avoided the real issues, and focused instead on trying to boost market sentiment. Worryingly his successor, Tim Geithner, seems to have inherited the same mindset.

2 months ago, Geithner announced that 19 major US banks would be subjected to a ‘stress test’. The idea was to check whether their balance sheets were strong enough to withstand more losses on their loans, if the economy continued in recession.

Soon afterwards, global stock markets took off on a major rally. Clearly some people believed that the tests would encourage investors to turn positive on financial companies again. This theory was confirmed when news ‘leaked’ that all 19 banks would, indeed, pass the test.

However, party-pooper Prof Nouriel Roubini now points out the test is “meaningless”. He says this is because actual data for the 3 variables being tested (GDP, unemployment and house prices), “are already running worse than the (so-called) ‘worst case scenario'”.

You can read the full details on Roubini’s blog. But it poses an interesting question. Will the Administration still have the nerve to suggest that all 19 banks are in the clear? Or will it, as the Financial Times suggests, now have to revise the tests to make them more credible?

Either way, the banks will still be in trouble. Their problems now include not just dodgy sub-prime housing mortgages, but also credit card debt and corporate loans. Rising unemployment means consumers will increasingly default on their credit cards, whilst continuing recession will force more companies into bankruptcy.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.


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