Our take on “Fed Said to Criticize Banks on Risk Models in Stress Test – Bloomberg”

Part of the stress test now involves capital planning where bank boards are asked to determine how much cash they can afford to use for stock buybacks or pay to shareholders in dividends in the future while staying above regulatory minimum capital requirements in a severe recession.

via Fed Said to Criticize Banks on Risk Models in Stress Test – Bloomberg.

The stress testing of the major banks is a good idea in the absence of nationalization of insolvent banks. However, how long will people remember? It wasn’t that long ago that the hubris of certain bankers was such that they were insisting that the mistakes of the Great Depression could not be repeated. We all remember Alan Greenspan admitting that he was taken completely by surprise by the Great Recession. His fundamentals failed miserably.

The private-sector’s real estate industry requires stability for maximum gains for the whole nation. It requires a sound banking system. Let us hope that the Federal Reserve’s moves are not mushy. Let us hope that the Fed can unwind all of the toxic assets it’s still holding after having taken them as collateral on loans to the banks and Fannie and Freddie, etc. Of course, Fannie and Freddie, even though they were poorly managed, did keep to a higher standard of due-diligence than did the average Wall Street investment bank. If real estate values rise across-the-board, the Fed will be holding much real value again.