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Saturday, April 18, 2009

"Bank Regulators Clash Over Endgame"

The bank stress tests are nearly complete, and there's apparently a debate over what to do with the stress test information on individual banks. Shouldn't Geithner have known what they were going to do with the stress test information before announcing the program in February? Or maybe figured out what those plans were over the last two months as they've been conducting the tests? Did they have plans and then realize they hadn't fully thought them through? Didn't we learn the dangers of going to battle without thinking carefully about the endgame and planning accordingly?

This exercise was supposed to build confidence in the system, but that doesn't happen when you put a policy in place before thinking it through thoroughly. Instead of testing banks, it's ending up as a test of Geithner's credibility as a policymaker, and instead of building confidence, it threatens to undermine it:

Bank Regulators Clash Over Endgame of U.S. Bank Stress Tests, by Robert Schmidt, Bloomberg: The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests of 19 U.S. banks, with some officials concerned at potential damage to weaker institutions.

With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements... While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicized, the Treasury is pushing for broader disclosure.

The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers. ...

Fed officials have pushed for the release of a white paper laying out the methodology of the assessments in an effort to bolster their credibility. ... A statement on the methods is scheduled for release April 24. ... The 19 companies may get preliminary results as soon as April 24, a person briefed on the matter said.

Regulators, all of which regularly administer exams to the lenders they oversee, have privately expressed concern about the tests and whether they will be effective, the two people said.

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said.

Geithner has said he crafted the stress test program in an effort to provide more transparency about the health of banks’ balance sheets. ... How the market handles the results is a chief worry of banks and regulators... Banking lawyers and industry officials said that the Treasury needs to be very clear with the public about the reviews, which by their design test events that may not happen. ...

    Posted by on Saturday, April 18, 2009 at 01:26 AM in Economics, Financial System, Politics | Permalink  TrackBack (0)  Comments (35)

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