Do you remember the bank stress test? It’s an invented formality designed to instill confidence in the nations leading financial institutions (XLF), regardless of how strong or weak their balance sheets actually are.
Bernanke described the purpose of the stress test as follows: The stress test “provided anxious investors with something they craved: credible information about prospective losses at banks.”
Mr. Bernanke is such a generous man; he gives everyone what they ask for. Banks get loads of cash just for asking, and investors get financially engineered reports that make them feel warm and fuzzy.
The bank stress test has become an annual routine. The March 2013 stress test found that 17 of the 18 biggest US banks (KBE) had enough capital on hand to survive a severe market crash.
A new Federal Reserve study isn’t quite as upbeat (and there may be a very calculated reason for this, more below). The study lists five leading practices, and comments that all the bank holding companies (BHC) face challenges across one or more of these areas:
1) Not being able to show how all their risks were accounted for in their capital planning processes;
2) Using stress scenarios and modeling techniques that did not address the particular vulnerabilities of the BHC’s business model and activities;
3) Generating projections for at least some components of loss, revenue, or expenses using approaches that were not robust, transparent, and/or repeatable, or that did not fully capture the impact of stressed conditions;
4) Having capital policies that did not clearly articulate a BHC’s capital goals and targets, did not provide analytical support for how these goals and targets were determined to be appropriate, and/or were not comprehensive or detailed enough to provide clear guidance about how the BHC would respond as its capital position changed in different economic circumstances;
5) Having less-than-robust governance or controls around the capital planning process, including around fundamental risk-identification, -measurement, and -management practices that are among the critical elements that support robust capital planning.
Deny, Deny, Deny Responsibility
This study is one of a number of recent studies that seem to be purposely designed to free the Federal Reserve of any responsibility for a major market crash.
Since 2008, the Fed’s number one goal has been to deflate yields (Chicago Options: ^TNX) and inflate the S&P 500 (SPY) and equity cohorts.
The recent studies seem designed to suggest whatever happens, it’s not the Fed’s fault. We gave you the medicine, but we’re not responsible for any unwanted side effects.
An August 8, 2013 Fed study sets the stage to blame leveraged ETFs for a 1987-like market crash. View leveraged ETF study here.
An August 12, 2013 Fed study denies the asset inflating effect of QE and basically prepares Americans for a market crash. View market crash study here.
The market crash study is particularly suspicious, as it is in direct conflict with a previous study touting that QE drove the S&P 500 (^GSPC) 55% above fair value. View inflated S&P 500 (SPY) study here.
What does the Fed know that we don’t?
Simon Maierhofer is the publisher of the Profit Radar Report.
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