“Not being as robust as the stress test would seem to imply” is still consistent with “significantly more robust than they would be in the absence of such a requirement”.
Naively, forcing banks to keep enough liquid reserves to handle an imaginary crisis situation should strictly improve their ability to handle an actual crisis, compared to letting them not do that (and competition between banks meaning that they’re usually better off not keeping extra reserves available rather than gathering interest etc). I’d be surprised if it were negative on net.
The idea that having insurance from another bank counts as passing a stress test doesn’t match any source on the first page of Google search results for “stress test banks”; the more specific ones mention that the requirement is maintaining at least 4.5% capital (as Dodd-Frank requires) on hand at the peak of the stress test scenario. Is there a source which says that banks are using massive insurance policies to pass these in place of capital?
What regulators spotted a couple of years ago is that banks were buying very focused packages of insurance that would pay off in exactly the scenarios of the stress tests. They had no commercial reason whatsoever, and were in fact probably quite expensive pieces of insurance to purchase. But it meant that the bank could, with a really straight face say, ‘Well, you know what? In this stressful scenario we’d be totally fine.’ And what’s going on under the table is, ‘Yeah, because our bet that this scenario would happen would pay off, and we’d suddenly get an extra half a billion extra dollars.’
That’s unfortunate to hear, and it seems like it could have been different.
In the case of food supply chains, though, it would be just a literal matter of counting and not accepting IOUs for food in lieu of actual physical food.
“Not being as robust as the stress test would seem to imply” is still consistent with “significantly more robust than they would be in the absence of such a requirement”.
My impression was that if anything these tests were making it worse, but I don’t have the reference to double check.
Naively, forcing banks to keep enough liquid reserves to handle an imaginary crisis situation should strictly improve their ability to handle an actual crisis, compared to letting them not do that (and competition between banks meaning that they’re usually better off not keeping extra reserves available rather than gathering interest etc). I’d be surprised if it were negative on net.
Having savings is boring and unleveraged. Buying insurance against an *extremely specific* scenario does even better on the tests and costs much less.
The idea that having insurance from another bank counts as passing a stress test doesn’t match any source on the first page of Google search results for “stress test banks”; the more specific ones mention that the requirement is maintaining at least 4.5% capital (as Dodd-Frank requires) on hand at the peak of the stress test scenario. Is there a source which says that banks are using massive insurance policies to pass these in place of capital?
Found my source.
I had misremembered the insurance as cheap.
That’s unfortunate to hear, and it seems like it could have been different.
In the case of food supply chains, though, it would be just a literal matter of counting and not accepting IOUs for food in lieu of actual physical food.