About Those Stress Tests...
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2009-11-06 10:17 by Karl Denninger
in Banking System Ignore this thread
About Those Stress Tests...

I said at the time they were nowhere near "stressful" enough in their "more adverse" scenario.

I was right.

Here's the table (thanks to Northwoodspete for pulling and posting it on the forum)

How about a bit of reality?

Real GDP looks to be a fairly decent guess on "more adverse", but the problem is unemployment.  The "average" estimate for 2009 was 8.4%, the "more adverse" was 8.9. 

But we are now at 10.2, and that's the "headline" number, not including the "disgruntled" or "not in labor force" folks.

The entire premise was that we would turn the corner on or before now, with the usual "lagging indicator" factor on the headline unemployment number.

That hasn't happened, as I reproduce again in this chart:

The turn upward in this chart was a near-exact correlation with the end of the recession in the early part of the decade.  Not only are we dramatically worse now, we haven't even begun to turn, and those who have exited the labor force continues to skyrocket.

The key item here is loan losses. 

They will not begin to stabilize until year-over-year job loss turns.

The Treasury "stress tests" did not envision this outcome.  I said at the time they were nowhere near pessimistic enough and did not demand enough capital be raised (probably because they couldn't.) 

But one of the premises of modeling outcomes is that your "worst case" scenario has to be worse than the expected range of outcomes.  That clearly has not happened, and leaves open the question of whether the banks that were pronounced "safe" really are.

I'd argue that based on the stress tests and actual economic performance the answer is a resounding NO!