Regulators are talking tough, but is anyone listening?

Anonymous officials warn that the results of the banking stress tests could cause "havoc" -- but that's a good thing, because it means they're doing their job.

Published April 2, 2009 6:40PM (EDT)

Just how stressful are the stress tests that are supposed to tell us whether American financial institutions are healthy enough to survive the remainder of the economic downturn? Critics like Simon Johnson, Paul Krugman, and Naked Capitalism's Yves Smith would undoubtedly scoff at this question. They believe that the stress tests are predicated on overly optimistic assumptions about how bad the economy will get. In their view, the stress tests are just a face-saving gesture.

So what to make of the Reuters article, "U.S. Regulators Bracing For Bank Stress Test Battle"?

U.S. regulators have reached the closing phase of "stress tests" to gauge the health of the nation's top banks, and are bracing for a battle to get those firms to accept tough appraisals.

Officials realize it may be hard to keep the assessments under wraps, and they are looking for ways the banks could disclose some details without causing havoc in the markets, regulatory sources say. If a bank needs more capital, any disclosures would likely come in concert with a recovery plan that could include government aid and private assistance.

Are these regulators just spinning or preparing the ground for some real surprises? Unfortunately, the Reuters article doesn't back up the thesis of this provocative beginning with any on-the-record quotes, so it's hard to make a call one way or another. But it would certainly make a big difference to the credibility of the current administration if the stress tests turn out to be legitimate.

I have just one additional question. Do the stress tests take into account the new accounting rules? Because as of today, all the banks are suddenly feeling much healthier. Seems to me that would cause some stress for the stress testers.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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