Stress testing - a well recognized tool for assessing the financial stability of banks had been talked about for quite some time now. But surprisingly, little seems to have been done till the recent financial crisis engulfed the world. The entire regulatory system world over seems to have finally shaken off its lethargy and taking up stress testing as an effective tool for assessing the stability of banks, in real earnestness.
In fact in the US, the incubator of modern innovative concepts and techniques, this is yet to be completed although their Indian counterpart has already come out with their results and seems to have passed with flying colours. Results were published in the Volume III of the report on assessment submitted in March 2009 by the Committee on Financial Sector Assessment fomed by Government of India jointly with RBI (ref: http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=544#3RANN2.2)
Unfortunately it seems that the US financial world had been more busy in innovating and putting to use more and more leveraged products aimed at earning higher and higher profits, without much attention to the risks associated with them and taking appropriate protective measures.
In fact it took a fast building public opinion against increased funding of loss making financial institutions out of funds available under Troubled Assets Relief Program to into action the central banking authority which was evident from the statement made by Mr Ben Bernanke, Federal Reserve Chairman recently "We're going to do an honest evaluation. We're going to do a tough evaluation [to] try to figure out how much hole there is, if there is a hole,".
Under the program, the country's 19 largest banks will undergo "stress tests" which will measure if banks can weather what-if economic conditions that could emerge over the next two years. If they can't, the banks stand to receive more federal aid on top of the hundreds of billions already provided by the Troubled Assets Relief Program.
According to analysts, taxpayers need accountability, and using a stress test is one method of the government confirming to the public that they have looked at the matter and found that this is a prudent investment for the taxpayers to make.
The US government is expected to release the results today which is widely awaited and is likely to answer the question ”How healthy are the country's leading financial institutions, and will they need more cash to survive should the economy get worse?”
While consumer outrage has been obvious, the health of the banks themselves has been harder to judge. Everyone knows that the ongoing recession has taken a toll on the banks, but how dramatically they have been affected is the question.
News reports Wednesday indicated that at least three big banks will need tens of billions more - nearly $34 billion for Bank of America, $10 billion for Citigroup and $15 billion for Wells Fargo.
In fact in the US, the incubator of modern innovative concepts and techniques, this is yet to be completed although their Indian counterpart has already come out with their results and seems to have passed with flying colours. Results were published in the Volume III of the report on assessment submitted in March 2009 by the Committee on Financial Sector Assessment fomed by Government of India jointly with RBI (ref: http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=544#3RANN2.2)
Unfortunately it seems that the US financial world had been more busy in innovating and putting to use more and more leveraged products aimed at earning higher and higher profits, without much attention to the risks associated with them and taking appropriate protective measures.
In fact it took a fast building public opinion against increased funding of loss making financial institutions out of funds available under Troubled Assets Relief Program to into action the central banking authority which was evident from the statement made by Mr Ben Bernanke, Federal Reserve Chairman recently "We're going to do an honest evaluation. We're going to do a tough evaluation [to] try to figure out how much hole there is, if there is a hole,".
Under the program, the country's 19 largest banks will undergo "stress tests" which will measure if banks can weather what-if economic conditions that could emerge over the next two years. If they can't, the banks stand to receive more federal aid on top of the hundreds of billions already provided by the Troubled Assets Relief Program.
According to analysts, taxpayers need accountability, and using a stress test is one method of the government confirming to the public that they have looked at the matter and found that this is a prudent investment for the taxpayers to make.
The US government is expected to release the results today which is widely awaited and is likely to answer the question ”How healthy are the country's leading financial institutions, and will they need more cash to survive should the economy get worse?”
While consumer outrage has been obvious, the health of the banks themselves has been harder to judge. Everyone knows that the ongoing recession has taken a toll on the banks, but how dramatically they have been affected is the question.
News reports Wednesday indicated that at least three big banks will need tens of billions more - nearly $34 billion for Bank of America, $10 billion for Citigroup and $15 billion for Wells Fargo.
Contributed by:
Prof Bikramjit Sen
(Globsyn Business School)
Source:
http://www.abcnews.go.com/Business/Economy/story?id=7522101&page=1
http://www.smartmoney.com/investing/economy/anatomy-of-a-stress-test-how-banks-are-judged/
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