The federal government has published its stress test for major banks. The stress test is to determine how vulnerable these large banks are to various economic worst case scenarios. The actual stress reports are being given privately to the individual banks.
Those banks who fail could be required to increase their capital reserves.
The stress scenarios involve worsening unemployment and continued declines in home values.
The goals of the stress test scenarios were to evaluate the extent of potential problems and to improve market confidence in the financial system.
The effect may have been just the opposite, to increase market instability.
With 27 bank closing through April 24, is the decision to focus on saving large banks the right choice? Saving the large banks, while allowing smaller, regional banks to close, serves to further centralize the financial market. It seems to me to create even more "too big too fail" liability for the federal government.
Is bigger always better?
Why is the decision to save the large banks? These banks hold 1/2 of all bank loans.
How much debate has occured on this too big to fail philosophy? How transparent has been the decision to go big?
Is it better to bet on fewer bigger banks, that were in a large way responsible for financial crash?
Is it better to bet on more smaller, regional banks? Possibly more in tuned with local needs?
Does it take a large bank to compete globally?
It the risk of "too big too fail" too great for our Treasury?
Here is the justification of the program, taken from Friday's publication of the Federal Reserve announcement for the The Supervisory Capital Assessment Program: Design and Implementation.
"Given the heightened uncertainty around the future course of the U.S. economy and potential losses in the banking system, supervisors believe it prudent for large bank holding companies (BHCs) to hold additional capital to provide a buffer against higher losses than generally expected, and still remain sufficiently capitalized at over the next two years and able to lend to creditworthy borrowers should such losses materialize. The purpose of the Supervisory Capital Assessment Program (SCAP), which is being conducted by the supervisory agencies, is to assess the size of these capital needs."
We are in position of needing to stabilize the financial market. This means protecting large banks. Does mean encouraging further consolidation of banking by allowing small banks to fail?
Should our policy be to continue to encourage larger and larger banks?
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The big reason we got in the present mess was the power of the big banks to push the unrealistic loans for big profits over the banks that were trying to do the prudent thing. Its not over yet.
Like Eric said, the big banks have problems they drag everyone down with them. Sometimes smaller is better.
The whole thing is a mess and getting worse. I think it would be prudent for all banks to understand what their core competency is, was, should be.
NO! NO! NO!
Too big to fail is not an economic fact. It's an excuse to continue to prop up failing institutions who are rewarded for making bad decisions.
If they are that big, they should be broken up.
Bring back Glass Steagal.
Lenn,
I absolutely agree you on this. Someone said, "Too big to fail is too big to be unregulated."
I think too big to fail is too big to exist.
But the decision has been made. With the initial AIG bailout, I thought it was a temporary fix to allow time for the company to be sold off in an orderly fashion. As it turned out it was just a way to fund the extravagant vacations.
We let small banks fail. We let home owners be foreclosed. We let mortgage servicers ignore reasonable modication and short sale requests. We let credit bureaus report inaccurate information.
But we do not let big entities with big lobby money fail.
Glass Steagal is needed. Congress is worrying about appraisers (already addressed) worrying about brokers (already addressed) worrying about yield spread (already addressed), but credit defaults are still in play. No coverage. Too complicated for congressional minds. Too much big money turning congressional heads.
Sorry, you got me going.
Richard
Too big to fail is not economic fact, but it is government policy. And it has not been debated. It has been decided and forced on us.
Richard