Tuesday’s release by the Federal Reserve of the results of its annual round of “stress tests” of the 19 largest American banks was yet another confirmation of the deftness with which the US government has handled the financial crisis. In stark contrast to the feeling of ennui that has often accompanied Europe’s initiatives to shore up its own financial system, the latest news from Washington was greeted with enthusiasm, with share prices jumping 1.8 per cent by the end of the day and the S&P financials index up by 3.9 per cent.
There is much to praise. The $700bn Troubled Asset Relief Program provided in late 2008 a solid financial firewall and stemmed the tide of fear and near-panic that had surrounded the banking system. It even turned a profit for the US Treasury, which invested just under $205bn in 707 banks and has so far received about $211bn back.
But clearly, the banking system is not yet perfect. Four banks failed the latest tests, most notably Citigroup, which said it would resubmit its capital plan, as required. However, even these failures must be seen in light of the severity of the stress test scenario, which assumes 13 per cent unemployment, a halving of stock market valuations and the kind of “market shock” that might be triggered by the collapse of a bank in Europe. Continue reading »