Half of U.S. Banks Will Fail Stress Tests, But Apparently That Is a Good Thing

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About ten of the nineteen banks are expected to fail government stress tests, today's Wall Street Journal reports, and will be directed to raise new capital in order to create a bigger buffer for themselves between recession and utter failure. But somehow, because of the exuberant market behavior, the convincing government spin, or the nice, springlike weather, the Journal does not treat the bare fact that around half of the banks in the U.S. may effectively be insolvent as cause for alarm. Actually, they make it sound kind of good!

The stress-test regimen appears so far to have eased some of the fears that swept through financial markets in February, just as President Franklin D. Roosevelt's bank holiday did in 1933. He shut down the nation's banks for several days during a banking panic and only reopened those the government deemed safe. One possible explanation for the recent, calmer state of affairs: The problems the tests appear to be uncovering aren't as bad as some analysts' worst expectations.


Wow, it's almost like someone — our Rooseveltian president? — was standing right in the room with the authors of this Journal story, maybe even giving them foot massages as they typed!

Also, if multiple banks are being directed to boost their capital, that could make the process seem less daunting than if it were singling out a few companies as weak.


Right, because at least then everyone's in it together. What? Anyway, the passing explanation offered by Bloomberg for this news being not-bad — that the reason the banks need to raise more money is that the administration is pushing them toward overcapitalization, like it's forcing them to plump up their savings accounts — makes more sense. But Nouriel Roubini, writing on the Journal's op-ed page, is not convinced. "The stress tests' conclusions are too optimistic about the banks' absolute health," he says, adding that the news coming from the bank's largest shareholder would only be good "if it were credible." Already, the market has been shamed into retreating.

More Banks Will Need Capital [WSJ]