Stress Test

The results from the stress test of the banks are out. You can read them here (see page 10). Back in March I had looked at whom the market was judging likely to pass the test using the simple criteria of ytd performance of the stocks underlying the test. The market got 12 results correctly. Not bad but still within one standard deviation of the mean of a binomial distribution.

"To nationalise or not, that is the question"

The debate continues. Martin Wolf in the FT asks "To Nationalise or not, that is the question" and concludes: "Call it a banana if you want. But bank restructuring itself must begin."
While doing so he quotes a fairly informative paper from Douglas Elliott of the Brookings Institution that addresses the following questions:

The background: Why might widespread nationalization be necessary? To restore capital adequacy
What does it mean to “nationalize the banks? Full or partial, temporary or permanent nationalization, how would the bank be controlled? what is the exit strategy?
What would be the purposes of nationalization? avoid throwing good money after bad, save taxpayers money.
What are the arguments against nationalization? scaring shareholders and creditors of weaker banks, pricing and fairness.
How has nationalization worked previously in the U.S. and internationally? Ok in the US with the nationalization of Continental Illinois in 1984, then the sixth largest bank with "only" 40bn US$ in assets. It still took seven year to completely divest the taxpayers' share. Indymac with 34bn in assets was in government's hands for a half a year. OK in Sweden as well with a cost to taxpayers of roughly 4% of GDP.
How could nationalization be implemented most effectively? Design a set of clear criterias and objectives, avoid political pressure, decide who is in charge and set a clear exit strategy.

The stress tests is a one of the criterias currently being implemented. Via CalculatedRisk here is a list of the likely 19 institutions with over 100bn in US$ assets that will be "stress tested". The list was compiled by Paul Kiel at propublica.org. I have added to the table the ytd stock market performance (as of March 4, ie before today's crash) to see which one may pass the tests. (red if the ytd perf is below the median of -56% and green otherwise)

Name	Total Assets (Billions)	YTD Perf
1. JPMorgan Chase	2,175	-39%
2. Citigroup	1,947	-83%
3. Bank of America (not including Merrill Lynch)	1,822	-77%
4. Wells Fargo	1,310	-67%
5. Goldman Sachs	885	1%
6. Morgan Stanley	659	21%
7. MetLife	502	-58%
8. PNC Financial Services	291	-53%
9. U.S. Bancorp	267	-56%
10. Bank of New York Mellon	238	-22%
11. GMAC	189	-59%
12. SunTrust	189	-63%
13. State Street	177	-43%
14. Capital One Financial Corp.	166	-67%
15. BB&T	152	-45%
16. Regions Financial Corp.	146	-56%
17. American Express	126	-37%
18. Fifth Third Bancorp	120	-79%
19. KeyCorp	105	-24%