Former FDIC Chairman William Isaac thinks the Obama administration seriously goofed in making the bank stress tests public.
“The biggest mistake is that we have Treasury and the White House regulating the banks instead of the independent banking agencies,” Isaac tells Bloomberg.
“That’s what leads to messes like this.”
“We should never have publicly announced that we were doing stress tests. We’ve been doing them for decades.”
The result: “All we did is stir up the markets. They got so stirred up they had to announce that the 19 banks won’t be allowed to fail,” Isaac says.
“So now we have 19 banks that we’ve announced publicly aren’t allowed to fail. That means if we have to put a lot of taxpayer money in it, so what?”
The problems come for banks below No. 19, “when they’re competing against people who’ve been publicly protected,” Isaac says.
“The 19 banks they say all have plenty of capital today. What they’re worried about is what happens in a severe economic environment. We don’t have models that can predict that.”
Isaac questions why we’re “forcing these banks to stop growing, shrink their balance sheets at a time when we‘ve told them we want them to increase their growth. We want them to make more loans.”
Others too criticize the stress test.
“The stress test results will not be credibly interpreted as a sign of bank health,” economists Nouriel Roubini and Matthew Richardson write in the Financial Times.
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