What the Bank Stress Tests Didn't Predict

[steven johnson]

There was a suspicion that Gaitner's stress tests for banks weren't tough enough. The evidence at this point seens to bear this out.

The Congressional Oversight Panel released a report on the "Continued Risk of Troubled Assets" last week that concluded community banks may be on the verge of a new crisis stemming from huge quantities of whole loans on their books that could turn toxic if the economy deteriorates. It analyzed 719 community and regional banks with assets between $600 million and $80 billion and counted $81.1 billion in potential core commercial real estare and construction loan losses through 2010.
The FDIC reports, for instance, that loan quality at all U.S. banks is the worst in a quarter century - 7.75% of the $7.7 trillion on their books in March show signs of distress - and it is deteriorating at the fastest pace ever.

http://www.fincriadvisor.com/2009-08-23/COPtoxicassetre...

...Institutional Risk Analytics...slapped a failing grade on 1,882 banks out of 7000 as of June 30, up 16.5 percent from the end of March; ...


Based on his preliminary review of individual bank reports, Mr. Whalen said the greater stress across the industry results from the large number of banks getting dinged by losses or charge-offs. The figures, Mr. Whalen said, call into question assumptions made by the government earlier this year, when it put major banks through "stress tests."

In short, the tests may not have been tough enough.

"The stress tests said that through the two-year cycle, big banks had to have enough capital plus earnings to withstand a 9 percent loss rate," Mr. Whalen said. "But what we're seeing with the levels of stress in the industry is that we are there now and we are not at peak of cycle yet."

What the Bank Stress Tests Didn't Predict