At a time when the government will release banks from their shameful conduct in the mortgage industry, they are also conducting stress tests to determine the financial health of those same banks. Given government policy that protects and coddles the banks, I would imagine the health to be shown as pretty darn good. And indeed, that’s the expectation:
In another milestone in the banking industry’s recovery from the financial crisis, the Federal Reserve this week will release the results of its latest stress tests, which are expected to show broadly improved balance sheets at most institutions.
The findings would be the latest of several signs of renewed strength in the economy, including the unemployment report last Friday that showed that more than 227,000 jobs were created in February.
For the financial sector, including traditional banks and Wall Street firms that were at the heart of the panic during the crisis, the recovery has been slow but steady, with some banks recovering much faster than others.
Still, while unpleasant surprises are possible, analysts are counting on the Fed to find banks largely healthy. That would stand in marked contrast with the holes, in the tens of billions of dollars, found on balance sheets in the first round of stress tests in 2009.
I think NYT reveals just a bit too much about how these stress tests get used to prop up Administration policies. The Fed will find banks “largely healthy” because they want to find them largely healthy. They want to keep confidence in the financial industry high, and they want something to point to so they can pronounce their prescriptions for the industry successful.
That doesn’t mean these stress tests reveal much of anything. In fact, the banks designed these stress tests themselves, we learned a year ago. It’s not so hard to believe they would pass them, given that. The banks did try to stop disclosure of the financial information in the stress tests, but that is mostly out of an abundance of caution. They don’t have a whole lot to worry about here.
The gift for banks at the end of this will be the ability to increase dividends. It’s expected that dividends will double in the coming year.
You cannot assess the success of the Administration’s financial policy from these stress tests. You have to take into account the extraordinary efforts in propping up these banks to bring them to the point where they can pass such a stress test.