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Bank Stress Tests

 
 
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The major averages enter the final hour mixed on little news. While the beginning of the week saw quite a bit of trade war tit of tat tariffs and rhetoric, as time went by the subject more or less faded from the headlines. This despite India preparing its own tariffs and the Europeans actually applying some tariffs of their own, with more to come. Crypto currencies get hit again following yet more hacks, thefts, and exchange problems. Bitcoin knocked on the door for a sub $6,000 reading but has so far held off.

The latest round of Federal Reserve Bank stress tests finds that all 35 significant domestic banks passed, and all 35 will be just fine if stocks tank 65% and the VIX or Volatility Index breaks 60 and real estate prices fall 40% residential and 30% commercial under the adverse conditions data set. This would essentially be a repeat of what happened in the 2007-2009 period. A lot of ink has been spilled on the veracity of bank stress tests in the post Great Financial Crisis period both here and abroad with more than a few critics labeling them as a marketing and advertising exercise, or if you want to be blunt, a sham. Given the suspension of Financial Accounting Standards Board Rule 157 which required banks to mark assets to market instead of using the banks “opinion” of what’s something is worth as they currently do. And yes this means that they can basically manipulate their assets and liabilities to their hearts content, you begin to appreciate the criticism leveled at the Stress Tests. Given that Deutsche Bank is on the FDIC troubled bank list and its ongoing travails that are by no means trivial and include a recent credit rating downgrade by Fitch. If I was going to bet which large bank gets bailed out with the next crisis, Deutsche Bank would be at the top of the list.

This is Caleb Lawrence Registered Investment Adviser Scotts Valley Drive and Willis Road in the Scotts Valley Plaza, Suite 202 or call me toll free at 888-RICH PIG / 888-742-4744.

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