Should we believe the US Treasury’s stress tests?
The results of the US Treasury’s stress tests of America’s 19 biggest banks yesterday were less bad than many were expecting. Nine of the banks, including JPMorgan, American Express and Goldman Sachs, were given the all-clear by the Treasury – they weren’t likely to need any more state support.
And the other ten banks, including Citigroup,Wells Fargo, Bank of America and GMAC, only needed $75 billion in fresh capital. That’s alot, but it’s alot less than the $480 billion that Nouriel Roubini, or ‘Dr Doom’ as the economist has come to be known, suggested the sector needed in February.
That means that, if the stress tests are correct, the government’s ongoing presence in the banking sector is likely to be limited, and we are unlikely to see the sort of mass nationalisation of the sector that many, including Roubini (and myself) thought we would eventually see.
Geithner declared that the results marked the end of a long period of uncertainty, and ushered in a new stage of transparency in the crisis.Markets, on the whole, seemed inclined to believe him, with equity futures up in the US.
Now, the debate has shifted quickly from a discussion of mass nationalisation to the question of letting banks fail. If only two or three banks need large amounts of capital – Bank of America, Citigroup and GMAC, for example – then perhaps there is less systemic risk in letting them fail, and the government should look to carry out an orderly winding up of these institutions in a way that protects depositors without bailing out private lenders.
That much was suggested by Roubini in the FT yesterday, who was quick to re-position himself after his original apocalyptic estimate was shown to be apparently wrong.
But are the stress tests really a step forward for market transparency, or instead a confidence trick? (more…)