Reinhart: Not everybody can be above-average in stress tests

Irrespective of whether one thinks the stress tests used to test the U.S. banking system is a sham (10% unemployment is not a worst-case scenario), the fact of the matter is these tests MUST show some differentiation in order to be credible.  Vincent Reinhart, a former Fed official now at the AEI, makes this case in the video below with Bloomberg News.

Most of us have fixed on whether the stress tests will be credible or not.  In order to be credible, there will have to be stress test winners and losers. Now, mind you, the government has to be very careful about the stress exercise hurting some institutions, so it will tread carefully. This is very much a political exercise. So, having heard Reinhart voice his view, my question is whether the winners and losers will be picked based on real financial differentiation or based on other more political factors.

  1. barryschaeffer says

    No doubt you’ve heard that Treasury is assuming that the mortgage-backed securities won’t fall much more, and are focusing on the potential loan losses that may have been incurred by regional banks which did “traditional banking”.

    Seems that this outcome is precooked in favor of Wall Street again.


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