China Said to Test Banks for 60% Home-Price Drop

Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, the person said, declining to be identified because the regulator’s requirement hasn’t been publicly announced. Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent.

China Said to Test Banks for 60% Home-Price Drop

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

Bank Stress Test Leaked?

The so called Turner Radio Network claims they have the results of the bank stress tests. To be honest, I am not really familiar with TRN. Here is a snip of what they are reporting.

1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent.

2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans.

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

5) Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular - JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank - taking especially large risks.

6) Bank of America`s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank`s was 278 percent; JPMorgan Chase`s, 382 percent; and HSBC America`s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital!

7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs,Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts!

For now I would be cautious about this information. If you would like to check it out, go here.

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Bank Stress Test Results due May 4

It appears the results of the bank stress tests will be released on May 4. Regulators also plan to release a paper describing the methodology next week, April 24.

The goal of the stress testing for banks is to raise public confidence. It will be interesting to see the reaction in the markets.

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Roubini: Stress Test Results are Meaningless

The word on the street is that all 19 banks subject to stress testing will pass. Nouriel Roubini has a long article on the assumptions underneath the testing and why they are bogus or no longer meaningful.

The purpose of the stress testing, as I see it, is to create confidence in banks. As a result, the perception in the market place is going to be critical for the direction of the stock market. Will the stress tests create confidence or more uncertainty?

Uncertainty is not good for stocks, and would likely send us back for a retest of the lows.

Roubini has a lot of detail in this report and it is worth reading, digesting, and considering. If he is right, sooner or later it is going to be very ugly in the stock market.

The stock market has good technical resilance right now and I have been writing about this often. However, the bull run from the bottom is getting a little long in the touch and the risk/reward ratio is starting to turn negative.

Stress Testing the Stress Test Scenarios

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