Banks Set to Pass Stress Tests By Definition

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"Banks Set to Pass Stress Tests By Definition"

This seems really stupid:

The federal “stress tests” that the examiners are administering are the subject of fierce debate within the banking industry.

Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs “exceptional assistance,” the government, that is, taxpayers, will provide it.

This is just to say that the banks will pass the test by definition because they’re operating with implicit government guarantees. That, however, is what we already knew! I thought the point of the tests was to open up the possibility that a minority of banks would be shut-down, while the others would be proclaimed healthy (as in actually healthy rather than “healthy given a government guarantee”) and we could shift out of the implicit guarantee phase.

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