Stress tests on banks should become a routine gauge

20 05 2009

1. Recently the Treasury Dept of  US put up stress tests on US banks. For those who are non-financials, stress test is a scenario testing, a test which predict what will happen if a downside scenario turned up. In the case of the banks, the stress tests resulted in how much does the banks will lose and how much more capital they need if the economy goes further down. 

2. The results showed that Bank of America topped the lists with 33.9billion needed, followed by Wells Fargo (13.7billion), GMAC (11.5billion) and Citigroup (5.5billion). This means that in the event of the economy woes go further, the banks will need the amount of  capital stated to remain in business (click on image below to see the results).

   


 

 

3. The stock market responded to this test positively. Since then markets around the world remained stable with convinvcing outlook. Obviously the stress tests has cleared the cloud which surrounded the financial markets of almost a year. It has stopped the bleeding and now is the time to cure the wound.

4. I expect that the economy will remain in the positive outlook with inflation rates and gas price remain relatively stable. A good time to invest in stocks?I would say 70% yes and will leave another 30% to the market risk and normal fluctuations. Ceteris paribus (no war,no tsunami,no earthquake,no terrorists attacks), the market has all the reasons to go up. Next quarter should give us some light on this.

5. I would like to see in the future that stress tests are done possibly every quarter. Financial institutions are the backbone of every economy and it cannot afford to falter or fail. The methodology behind stress testing should be rectified and improved so that it will give a true picture of a financial institution’s stability. Stress tests should become a routine gauge.

6. Another thing I would like to comment is the program called TARP (Troubled Asset Relief Program) by the US Treasury. What is interesting about this is that Malaysia put up this kind of fund during the 1998 financial crisis. It was called Danaharta. The task is basically the same; aimed at buying financial institution’s bad assets. Does this means that the US approved the bailout of our banks during 1998 crisis when at that time they belittled our effort to save the economy?The asnwer:Yes. They bailed-out theirs recently with TARP. Does this means that our economists are world class economists eventhough they are not graduates from Harvard, MIT or Yale?The answer is Yes,Yes and Yes. It’s wonderful to see from this particular side (how we saved our economy) that Malaysia is indeed has already become a fully developed nation (because a developed nation copied our actions). It’s just that some of the people still possess the third class mentality.

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