Money and Morning:
The assumption of testing through the end of 2010 means only that a two-year window was established for definitive calculations. Under this scenario, examiners assumed two-year cumulative losses of 8.5% on mortgage portfolios, 11% on home-equity lines of credit, 8% on commercial and industrial loans, 12% on commercial real estate loans, and 20% on credit card portfolios. The results are then totaled and weighed against assumptions - again unknown - about the capital positions of the banks at that time.
In fact, the key problem with the whole stress-test exercise is that it does nothing to improve financial-system transparency - something I’ve said would be key to a true reformulation of the U.S. banking system. As currently conceived, there will be no clear assessments possible as a result of these tests upon which private investors can rely to provide the necessary capital to make up for any shortfalls. The stress tests may, in fact, have the opposite effect - and could discourage new equity investment in any of the banks.
Ai note: stop joking about transparency! There is transparency, we now know who works for Goldman, BofA, Citi..
What should US Treasury do?
What it should have done is conduct system-wide tests on all banks, after which it systematically merged and shut down institutions that were either desperately threatened, or downright insolvent.
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