The most revealing result of the just-completed stress tests the big banks lately went through isn’t the size of the potential losses that might occur under the Fed’s “severely adverse” scenario, in my view, but rather the difference between the assumed losses the Fed came up with and the banks’ numbers. Have you seen them? According to the Fed, for instance Wells Fargo would take a $25.7 billion hit under its severely adverse conditions, while Wells Fargo itself, operating under the same set of assumptions, puts its hypothetical loss at just $1.7 billion. That’s a $24 billion difference. For JPMorgan Chase, the difference between its hypothetical losses and the Fed’s is $32 billion. For Goldman Sachs, $13.9 billion.
This is no way to regulate banks. The gaps between the two sets of numbers make it pretty clear that the stress tests aren’t “tests” in the way the word is commonly understood: a rigorous process of assessment. Rather, they appear to be a series of assumptions piled one upon the other, designed to produce the output the regulators want. An outside observer might be forgiven for thinking, for instance, that since JPMorgan Chase has been naughty over the past year (it jumped the gun in announcing last year’s results, remember, never mind the London Whale), it got a little CCAR-related spanking. Thus that $32 billion gap between its estimated losses and the Fed’s. Bank of America, meanwhile, has spent the past few years in the doghouse but lately seems to be getting on regulators’ good side. Surprise! There was just an $8 billion gap between its estimated losses and the Fed’s estimate.
This appears to be highly arbitrary regulation, and it doesn’t do anybody any good. Not the banks, who are forced to operate in an environment of heightened uncertainty at a time when they could use less of it. Not borrowers, who will find credit more expensive and less easy to get. And not voters and taxpayers, who’ll have to put up with slower economic growth thanks to regulators’ ham-handedness.
I’m not against thorough regulation of the banks, and admit to having an honest disagreement with those who favor more stringent oversight of the industry. But everyone should agree that the best regulation is consistent, even-handed, and as transparent as practicable. These annual stress tests are none of those. At the very least, the Fed could explain the differences in its model, but for some reason does not.
What do you think? Let me know!