“… equally efficacious, and equally a hoax.” – Benjamin Disraeli, 1848[1]
One of the highlights of the U.S. summer for Fed watchers is the annual ritual in which the Fed’s economic soothsayers peer into their crystal balls, a.k.a. their stress tests, to reassure us that the U.S. banking system is robust and getting stronger all the time.
You see, while the future is uncertain, the results of the stress tests are not. Praise be that the news is always good and getting better.
This year, the news is particularly good. As usual, the key capital metrics across the system are better than ever. And whereas in previous years there were always dunces who failed, the latest set of stress tests are the first in which all the banks passed and this year’s class laggard, Capital One, got only the mildest of slaps on the wrist.
As James Ferguson of The MacroStrategy Partnership notes in a recent commentary on the latest stress tests:
… everywhere you look, the Fed now seems to be bending the rules in the banks’ favour. … This [stress test] appears to be a test that has been designed to be passed.”[2]
In fact, the Fed is so pleased with the performance of its stress-test examinees that it decided to reward them (or, more precisely, their shareholders) with a big dividend/buyback party that will give them a big windfall.[3] The Fed provides the punchbowl which will be paid for by other bank stakeholders including taxpayers — yes, the same taxpayers who are still being compelled to subsidize the banks (via Too Big to Fail, deposit insurance, and such like) to take excessive risks and overleverage themselves, and who stand to pay the bill if there is another crisis and the banks get bailed out again.[4]
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