“Bank stress tests are fun. They are interesting. So is a game of Monopoly. Do not mistake either for reality,”
Bank stress tests are essentially worthless exercises after the Federal Reserve gave passing grades to all 31 institutions it tested.
The Fed’s stress tests released late Wednesday showed U.S. banks passing after absorbing $685 billion in hypothetical losses, in a severe global recession scenario with a 40% decline in commercial real estate prices and a 36% decline in house prices.
A separate test where five large hedge funds collapse, found losses of between $70 billion and $85 billion.
“Sadly… the reality remains: a) regulators plan to address the next financial crisis by understanding and planning to fight the last one, b) financial crises keep repeating, but no two crises are alike, and c) risk is not a constant, it is constantly changing dynamic,” he said.
Here’s what he says makes stress tests meaningless:
“Consequences – you can set scenarios, but in the real-world unanticipated consequences make it impossible to fully model outcomes,”
Steve Goldstein MarketWatch 27 June 2024
Stress test
https://englundmacro.blogspot.com/2023/04/stress-test.html
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