Banks need to be constantly monitored

IT is heartening to note that post 2008 financial crisis, the stress tests on banks are still being dutifully conducted. Come Thursday, the Federal Reserve is expected to release results of its latest round of stress tests on 19 large US banks.

Prior to the US subprime crisis in 2008, which dragged down some of the largest financial institutions in the United States and Europe, stress tests on banks were not much talked about.

Following the European debt crisis, questions have surfaced whether some of these stress tests were indeed “stressful” enough, that is, whether the levels tested were rigorous enough to withstand extreme conditions.

The upcoming revelation by the Fed is said to be the “most extensive yet.” According to Reuters, the information will likely include stress scenario estimates of pre-tax income, total assets and loan-loss provisions; capital positions under test conditions, as well as the deterioration in several loan categories.

Six of the largest US banks that have large trading operations will also be tested on how well they would respond to market conditions similar to the second half of 2008 after Lehman Brothers failed, which will include strains related to the current European sovereign debt woes, with particular focus on banks’ counterparty risks, according to Reuters.

Transparency appears to be the paramount concern in the revelation of these parameters. No longer will these tests be conducted in shrouded secrecy but to regain the full confidence of investors and financial analysts, they will be made public.

Public money was used to bail out some of these large institutions; therefore, the public has the right to know what happened to their “investments” that were used to revive some of these banks.

The point to remember is that this should not be a one-off practice that is dished out only during crucial times such as the current fragile recovery phase of the US economy.

There may be concerns over competitive positioning with the release of so much confidential information that could pertain to a certain bank’s weaknesses.

This should be seen as a time for rectification and banks that fall short of the standards should provide an explanation on how they intend to make good their positions.

Stern measures are usually not popular but past experiences, especially in relation to insufficient capital, indicate the need for regular, consistent monitoring.

• Associate editor Yap Leng Kuen awaits similar release of interesting bank information