Tuesday, February 24, 2009

Economic News and Stress Tests

by Bill McBride on 2/24/2009 10:00:00 PM

For the late readers, earlier today I graphed the price-to-rent, price-to-income and real prices based on the National Case-Shiller Home Price index.

Here is the monthly Case-Shiller data: Case-Shiller: House Prices Decline Sharply in December

And the Fed released the Q4 delinquency report: Fed: Delinquency Rates Increased Sharply in Q4

And the joke of the day comes from Senator Dodd: "The stress test has introduced stress."

From CNBC: Handicapping the Bank 'Stress Test'

“The outcome of the stress test is not going to be fail or pass [for banks],” Benrnake told legislators, but to “get a clear estimate of their capital needs.”

Thus far, the Treasury has only said that: a) the tests would be applied to banks with assets over a $100 billion, which is essentially the top 20; b) banks found lacking would be told they needed to raise private capital; c) if they were unable to do so, they could apply for government funds under the newly created Capital Access Program, CAP, ... d) funding would come from the second tranche of TARP.
Here is more from Bloomberg: U.S. to Get Bank Ownership Stakes Only as Losses Rise
“I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary,” Bernanke said at the Senate Banking Committee hearing.
...
Bernanke also said the so-called stress tests that regulators will run on the 19 banks will look at potential losses over a two-year horizon if the economy worsens.

The stress tests “will look at the balance sheets and the capital needs of each of our 19 largest $100-billion-dollar-plus banks over the next two-year horizon,” ...

The assessment will use “both a consensus forecast -- where we think the economy is likely to be based on private sector forecasts -- and an alternative which is worse,” Bernanke said.
We will know more tomorrow when Treasury Secretary Geithner speaks tomorrow (Wednesday), but this is definitely different than my original understanding of the purpose of the stress tests.

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