The Folly of The Fed's Bank Stress Tests

Today is apparently the day on which various US banks are privately told their Fed "stress test" results. I haven't yet written on this topic because there were many other more interesting ones at hand. However, given what's transpiring today, it seems appropriate for me to finally address this topic.

To me, the whole process is a political charade. There are at least three bank examination processes which already exist among the Fed, FDIC and OCC. Such examinations were supposed to have been adequate for the past few decades. Since neither new people, nor organizations, have been used, just what will have changed in this process to make it better than what were supposed to be appropriate in the past?

If these new stress tests supplant or augment inadequate prior examinations, then why were these new style tests not used in the past?

Is the new stress test not a prima facie admission by Congress and prior administrations of both parties that their regulation and oversight of banking was inadequate?

Does this not, in part, absolve bankers of being the prime cause of our recent financial system difficulties?

One guest on CNBC this morning noted an interesting time sequence. He observed that the stress test results are to be released prior to the deadline for the GM funding negotiations. Will not, he asked, the stress test results be used to coerce Chase and other banks into being more forthcoming in caving in to federal government demands for bondholder acquiescence in the negotiations?

Of course, the two more liberal-leaning CNBC anchors gasped and looked shocked- SHOCKED!- that our federal government would ever behave in such a manner.

But it is, sadly, entirely believable, and probably true.

Some argue that governmental assurance, via these stress tests, that banks are sound, will result in more inter-bank lending.

I doubt it.

After the tacit admission of regulatory ineptitude, and the specter of the Congress letting Fannie and Freddie run wild, what sensible bank CEO is going to trust any governmental assessment of private sector solvency?