Critical stress test for banks dumbed down

More than a decade after U.S. taxpayers had to rescue some of the world’s largest investment banks from their own hubris, the federal government is making life easier … for the investment banks.

Following the massive global recession that was fostered partially by the banks’ irresponsible and unaccountable conduct, Congress passed the Dodd-Frank law requiring banks to maintain adequate reserves to weather a crisis without taxpayer help, and establishing annual stress testing to ensure compliance.

Although the stress tests cannot replicate an actual crisis, they at least require the big banks to ponder crises that might arise involving anything from foreign economic complications to the solvency of their trading counterparties.

This year, all 18 of the nation’s biggest and most complex passed their stress tests, demonstrating that they have adequate reserves to withstand crises posed by the tests.

President Donald Trump came into office vowing to diminish the Dodd-Frank regulatory regime. But, according to reporting by Bloomberg and The Washington Post, he already had some unexpected help from the Obama administration.

For example, regulators have advised the banks in advance of the models they will use to assess the banks’ responses to stress scenarios.

That is the equivalent to giving a student the answers to a test before he takes it.

Banks can use the data to structure their assets to comply with the model.

To make it easier, regulators also have eliminated the “qualitative objection” that allowed them to assess banks beyond the numbers.

That device required banks to demonstrate that they have a handle on the actual risks that the face in evolving markets — largely the issue that led to the 2008 meltdown. The banks can’t be wrong on questions that aren’t asked.

But, no worries.

These institutions are full of extremely bright people. What could go wrong?

The (Scranton) Times-Tribune

www.thetimes-tribune.com

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