What Will Happen When We See Bank Stress Test Results?
As usual since the financial crisis first broke, there is a great deal of news about banks today. In addition to President Obama unveiling the details of the mortgage modification plan announced two months ago, he also mentioned that he plans to make public the results of the bank stress tests that were overseen by Timothy
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Geithner not too long ago.These bank stress tests were designed to give regulators and other government officials an idea of which banks were healthy and which were unlikely to survive the recession. One of the requirements was to see how well capitalized major banks are. When stress tests were first announced, the stock market reacted unfavorably. However, the market didn’t seem too concerned with announcements today about the stress tests, ending up more than 100 points. Maybe it was the optimism surrounding the mortgage modification program. Or perhaps it was the better than expected earnings data that has been rolling in.
But things might change once Wall Street has had a chance to mull over the stress test results. First of all, there are concerns that revealing stress test information could hasten the failure of some banks that appear to be unable to handle the recession. It could even mean the failure of banks that are on the edge, but may not go over otherwise. These sorts of issues send a blow to investor confidence if they find out the banking system is even more unstable than thought.
On the other hand, revealing stress test results might be helpful. Investors would have better, more complete information, helping them to make wiser choices. Banks that “deserve” further investment would get it, and the investors would feel more confident about getting returns (and investing more). And some free market types argue that allowing some of the banks with poor results to fail — and do so quickly — would help things in the long run.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
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