June 26, 2016

The Federal Reserve’s stress tests of banks are dangerously incomplete.

Sir, Ben McLannahan and Gillian Tett write that the US Federal Reserve reported that “Every one of the 33 US banks that took the first part of the annual “stress test” passed it” “US lenders face higher stress test hurdle”, June 25.

That is good news. But the bad news though is that, as I have said time after time, those stress tests are incomplete. They only include what is on the balance sheets of banks, and not what these should include but perhaps do not include. And that means that the all-important social role of banks of allocating credit efficiently to the real economy is completely ignored.

If banks run into problems because of allocating credit in accordance to the needs of the real economy, that is a much lesser problem than if the real economy does not have adequate access to bank credit.

What do I suggest? Analyze for example the evolution of how many credits, not guaranteed with house mortgages, have been given over the years to “risky” SMEs and entrepreneurs, and I am sure you will be shocked with how the credit risk weighted capital requirements for banks have distorted.

@PerKurowski ©