Bank Pressure Test Nonsense

Again the "authorities" can't get it right.The tension test are about 1 factor and 1 factor only - FAS 140.These extra cash reserve needs are not about surviving the recession, they are about surviving the modify in guidelines that will eradicate QSPE's (most of them anyway), forcing banks to repatriate or add assets to their balance sheets.Only banks have neither the reserves nor enough capital to do so.

The Federal Reserve estimates that by 2010 (when FAS140 is scheduled to take effect) $900 billion in loan securities will have to be added to balance sheets, including $700 billion in risky assets - even although estimates are from $5 to $7 trillion in QSPE assets total.Coincidence that Treasury Secretary Geitner wants to eliminate $1 trillion in assets from banks by the finish of this year?

When again government meddling is threatening the economy.Forget acquiring banks to lend, they are terrified of the prospect.It really is no wonder the securitization market has frozen - any new activity will come crashing back to the banking agent subsequent year with all the new regulatory consequences.

For all the bluster about acquiring banks to lend, it is not the regulated banking system that is broken.The securitized, shadow banking system is broken.Securitization is not the enemy right here, the downfall of the system was the kind and quality of assets, not the method by which they had been dispersed.Fixing this market is somewhat effortless by way of increased transparency, not regulation.If investors knew what was going into these assets in 2006 and 2007 (and how the structures genuinely functioned) there in no way would have been a crisis and no want for government involvement.

Now that the contracting forces are starting to decelerate, the last factor this economy desires is feeble, or unfavorable, credit growth.And the actual danger is an even narrower reinterpretation of FAS 140 that forces a heck of a lot far more than $900 billion onto the backs of the banks. Undertaking so displaces new lending at a rate considerably greater than 1 (that $900 billion in old loans tends to make it impossible to initiate about $1.3 trillionin new loans the economy desperately desires).

By my calculations, setting asidethe impacts of FAS 140 for a moment, and the alterations in FAS 157 (mark-to-market) that occurred on April 2 would be far more than enough to carry loan loss increases due to the recession.The banks agree, which is why they are disputing the results. That leaves theattempt to regulatethe QSPE's and the shadow banking system as the only functional cause for the tension tests.

Judging from the results, even the Fed admits that FAS140 will kill lending - therefore the want for large amounts of new capital. This has nothing to do with the recession and almost everything to do with increased regulation.

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