The results from the Treasury's "stress tests" of the 19 largest U.S. banks will be announced on Thursday in what will also be a stress test for the American public. James Kwak nicely describes the fine line that Treasury will need to walk in deciding how much of the results to share with the public. This is an interesting case in which one could debate the relative merits of full transparency versus "enlightened" (giving Geithner and company the benefit of the doubt) leadership. If the tests demonstrate that the majority of bank assets are safely held in sufficiently capitalized banks, this might be a great boost for the financial sector and help accelerate a resumption of consumer and business lending. Yet, many seem to fear this will not be the case. Then the question becomes: how much bad news can the American public handle?
Kwak points out that it has been in the Treasury's interest until now to treat banks as "one undifferentiated mass," i.e. not elaborating on the distinction between the healthy and less healthy banks. We also may think it has served us, the American people, to think of the financial system in this way. But hopefully Thursday's announcement will reveal enough detail about particular banks for us to disentangle ourselves from this paralyzing picture of the system as one, irreparable blob. Treasury will have to make some tough calls, it seems. Hopefully they will share this news with the rest of us so we can all prepare for the tough clean-up process ahead.
Thanks are due to Blake for reminding me that I, too, have a blog.
1 comment:
Thanks for the post!
This move by Geithner seems reminiscent of the Emergency Banking Act of 1933. FDR closed all the banks for four days, during which federal inspectors looked over their books and declared them to be either solvent or insolvent. It ended up that about a third of the banks were closed, with the other two third allowed to re-open.
By declaring that the banks had passed federal examination of their solvency, FDR was able to restore some confidence in the banking sector. Geithner seems to be trying the same move, although without closing the banks, and without actually examining their solvency (just their resiliency to continued recession).
I don't see how any bank could survive a negative report from the Treasury on Thursday. So, unless all the banks have miraculously recovered in the past 1-3 months, we'll likely see a few bank failures in a weeks' time (which will lead to a quick government rescue). And while those banks that pass muster may enjoy short term public confidence, that's still no guarantee that they're actually solvent.
Some links:
•Nouriel Roubini on the stress tests•Wikipedia's article on the Emergency Banking Act
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