A few weeks back, we noted that the stress tests being performed on the nation’s largest banks may amount to a papering over of the banking system’s ills. Today, the Associated Press released Federal Reserve documents showing that this suspicion may be accurate, as the tests “take a harsher view of loans than of other troubled assets,” which is an approach that favors the Wall Street banks grappling with securitized assets:
The regulators’ focus could spell trouble for big regional banks undergoing the tests. Their portfolios have more individual loans and fewer of the big pools of securitized loans that Wall Street giants specialize in. Some analysts said regulators are favoring the largest banks because if even one failed that would pose a severe economic risk. Banks that deal in securities are more interconnected to other corners of the global financial system.
John Carney at Clusterstock wrote that “if this allegation is true, it means the government is willing to use the stress test as a cosmetic aid to banks holding toxic assets.” And with the International Monetary Fund confirming today that the US economy is staring down $2.7 trillion in toxic assets, cosmetic aids are surely not going to be enough to salvage the banking system.