Why we should be Stressed over the Stress Tests…

With all the talk of the Government Stress Tests lately, I thought some rational explanation was warranted..

First, banks have been required to stress test their balance sheets since their original formation, including any denovo institution. All banks undergo regular regulatory exams which include stress testing of their balance sheets under various, interest rate, credit risk and capital scenarios.

Second, the nineteen banks that are part of the “Stress Test” being discussed could not be in a more varied set of businesses… On one hand we have the largest deposit gathering bank in the country, and on the other, a bank with virtually no deposits or branches, and every other type of business that a bank holding company might have, including investment advice, mortgages, real estate, hedge funds, derivative products, insurance, etc… How is it possible that one test will identify the strong from the weak in this set of banks?

The Stress Test although well intentioned, has added a political side to appease the populist voice being heard by our leaders…

It is clear to me that none of these nineteen “too big to fail” banks can, or will fail the stress test… Instead we will hear about how our banking system is safe from catastrophe, and that some of these institutions may need some additional capital to weather an impending storm. If the institutions are unable to raise the additional capital in the private sector, then they will be able to use a new TARP II funding program.  That’s when the fun will really begin.

Congress is not ready to appropriate more money to this cause; the banks will not like the terms of any new TARP II program…

And once again, we find ourselves concentrating on those that have created this mess, and looking for the best way to bail out banks that should be broken up instead. All this while the solvent, strong and functioning community banks receive no help, and worse, are being forced to pay a FDIC assessment which will substantially reduce not only their ability to lend, but will exacerbate the downward spiral of lower earning, lower share price, and difficulty in raising new capital.

Instead let’s look to support our community bank system and the economy by:

  • Eliminating the FDIC additional assessment altogether
  • Create a tiered FDIC fee arrangement that rewards traditional banks with a lower fee structure, and charges more for the bigger risk takers; peg fees to assets, not deposits
  • Reducing the Regulatory and Tax Burden on Community Banks
  • Incent more lending by allowing 1 & 2 Rated banks to lower their capital ratios; and/or provide a low cost TALF alternative geared toward community banks
  • Support the Federal Home Loan Banks, allowing community banks to better participate with first time home buyers, and those seeking to refinance


Our leaders need to understand that it is the community banks that are currently expanding, lending, hiring, and growing profitably which is providing the fuel that economy so desperately needs. Let’s get on with the Stress Tests, and then take a step back, and look to support those that know how to get the job done (our community banks)  and then onto how to re-sculpt the financial landscape so that we never have a systemic risk again…

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