Regulation and Compliance > Federal Regulation

Stop Stressing

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The federal government has completed its stress tests of the nation’s 19 largest banks and bank-like institutions and in this era of trillions of dollars, there is good news. The amount of capital deemed to be needed by these banks is a mere $75 billion.

I don’t know about you, but after what we’ve become accustomed to, $75 billion seems to be in the realm of Monopoly money. Or perhaps, it’s that all money has entered the realm of Monopoly money.

In any case, almost half of that $75 billion (or $33.9 billion) is said to be needed by Bank of America. Wells Fargo is said to need $13.7 billion, while the only other institution in the 11-digit category is GMAC, which would need $11.5 billion.

The one insurer in this group of 19, Met Life, apparently does not need to raise more capital. That’s good news for the insurance industry (which certainly can use some).

The results of these stress tests were judiciously leaked over a week’s time, which greatly relieved any stress the stock market had been feeling in this regard. So, BofA needs $34 billion? Man, that’s nothing, chump change.

The announcement of the results of the tests set off a scramble among those banks deemed needy to raise the required capital. In lickety-split fashion, Morgan Stanley and Wells Fargo raised billions within hours.

Just how stressful these stress tests actually were is a good question. A lot of the pressure was on the government, which had to walk a fine line between declaring a lot of the banks zombies, which would have freaked out the market, and letting them all off the hook, which would have looked like a whitewash job. The market seems to have been satisfied that the administration walked that line the way it was supposed to.

The banks also were apparently able to negotiate with the government on certain parameters of stress measurement. It does so much to relieve stress when you can call at least some of the shots, doesn’t it?

These tests were done to see how much additional capital might be needed under a worst case scenario. The actual amount of losses that would be sustained is much larger, totaling some $600 billion.

What is somewhat scary is that mortgages and real estate loans, which caused the first tsunami of losses, are not the biggest problems for some of these banks. A couple at least are on the hook for huge potential losses in credit cards, which are just starting to get into dangerous waters.

Whatever the results of these tests, one thing is fairly clear to me: Banks, no matter what size, need to be reined in. They’ve gotten way too big, way too wayward and way too brazen. And all of this was under federal regulation and oversight!

It seems to me that when you get to a certain age you lose faith in panaceas. Federal regulation is not the panacea a lot of folks would like to believe it is or could be.

Those who are looking at tougher federal regulation as a panacea (now that the horse is out of the barn and is dragging our financial system with it) are chasing some kind of pipe dream.

Part of the problem has been that federal regulators, as I’ve pointed out in the past, have been more cheerleaders for their wards than overseers. They enabled the unbridled growth and inordinate amount of risk-taking that brought the system perilously close to collapsing. Has that really changed?

Did I mention before that the one insurer in this group of 19 was judged not to need more capital? Yes, I did.

It makes me think that any federal regulator or agency needs to get some stiff training from their state insurance counterparts so that they can recognize that regulation means strict oversight with regard to solvency and leveraging, not thrusting pom-poms as forcefully as you can, while shouting, “Give me a B, give me an A, an N, a K! Go banks!”

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