Wednesday, April 22, 2009

PIMCOs Mohamed El-Erian on the Bank Stress Test

The article was written by PIMCO's Mohamed El-Erian.

The stress tests will accelerate the redefinition of the financial landscape, with a meaningful impact on future economic growth and welfare. However, whether the impact is for good or ill depends on how the results of the tests, and policies that flow from them, are pursued.
He makes the following key points:
  • The report must be transparent. He points out that the results will be examine by analyst all over the world. As a result, the methodology, assumptions, and analysis needs to clear and easily understood.
  • The results should be forward looking. The report should explain how the good banks get out from under the government. And, how bad banks that do not have access to private capital will be handled.
There can be little doubt that the release of the bank stress test information needs to be clear, concise, and understandable.

This is essential to create confidence in the market place. If the bull market in stocks is to continue, the report must create a sense of confidence. Anything less is likely to send the market back for a test of the lows we saw in early March.

This is a well written article that should be read and considered.

Bank tests we should get stressed about