March 06, 2015

Real stress tests on banks are not performed, since these would evidence the failure of regulations.

Sir, Gillian Tett writes “One reason the banks got into such trouble before 2007 was that they had all learnt to game the regulatory system in a similar way”, “Stress tests are predictable act of public theatre” Marc 6.

That’s not so. There was no reason to game regulations that explicitly allowed banks to hold little or no equity against exposures to sovereigns (like Greece), exposures to AAA rated (like the securities collateralized with mortgages to the subprime sector) or to real estate (Spain).

But the current stress tests are indeed useless spectacles.

Societies give their banks a lot of supports. And obviously that is not only so that banks will repay deposits, since for that a storage center for matrasses containing cash would be more efficient. We support banks because, one way or another, we expect banks to support our economies. And so in this respect any real stress test would have to analyze whether banks were performing and under stress would be able to perform with what is expected of them… like continuously giving small businesses and entrepreneurs, reasonable fair access to bank credit.

Those real stress tests are not performed because they simply would put in evidence the total failure of current bank regulations. If banks are not performing now... how on earth will they perform if subjected to stress?

PS. Gillian Tett mentions that “the same consultants, now offering advice about stress tests”, aided banks gaming before 2007. If so, those consultants, who should be named, do represent a systemic risk, the Systemic Important Consulting Groups. Those SICGs and might be even more part of the Systemic Important Financial Institutions, the SIFIs than anyone of the Too-Big-To-Fail banks.