Market Talk

Even as details of the stress-test results have emerged in the last few days, industry observers are still questioning the validity of these tests.

The official release comes tonight, but as of now, it seems at least seven of the nation’s 19 top banks that were tested need to boost their capital levels by $65B.

Have the stress tests really given the public a true sense of how the banks can get through the recession, or have they given a false impression that doesn’t accurately portray the banks’ troubles?

Financial firms are always subject to oversight on an ongoing basis, but “the fact that the stress tests toook place at all was an admission of regulatory failure,” naked capitalism blogger Yves Smith writes on NY Times’ Room for Debate blog.

“The notion that a one-shot effort is a substitute for insufficient supervision is spurious,” she says, noting these stress tests should’ve taken place a year ago, when the books at Bear Stearns proved no one knew what was going on at these firms.

“But the stress tests fell far short of the needed level of review,” and banks got to negotiate the results. “This is simply unheard of,” she adds.

Stress tests were supposed to determine if banks would have enough capital if the recession got worse. But the “stress” scenario only accounted for a mild downturn, effectively meaning the tests were designed not to let anyone fail, according to former IMF chief economist Simon Johnson.

“The handling of the stress tests shows the administration prefers to adopt a ‘wait and see’ policy toward banks,” he says. “If the economy recovers, this will help the banks get back on their feet. If the economy doesn’t recover, more subsidies for banks will soon be in the mail.”

Once the results are officially released, analysts will then ponder what the results mean for smaller banks that weren’t tested.

Regardless, no outcome from the stress tests will yield a particularly helpful solution, University of Oregon economics professor Mark Thoma writes at Economist’s View.

If banks pass the tests, people will argue they were too easy. But some institutions failing the tests – or not doing as well as their peers – could create more fear and uncertainty in markets, he says.

“I hope I’m wrong and Treasury can, in fact, convince people that the tests are credible, and the outcome is optimistic, but with all the uncertainty surrounding this process, that won’t be easy to do,” Thoma says.