Stress Testing Stress Tests: Regulators Try to Analyze Banks

Federal regulators are trying to figure out how to analyze the stress tests they instituted for banks a couple of months ago. The idea behind the stress tests for banks is to figure out whether or not a bank is likely to survive. Stress tests are meant to help the government figure out which banks are worth helping, and which would represent an endless money pit if the economy reached a certain "critical" point. Stock Market Funding has this on the point of stress tests for banks:

Regulators designed the stress tests to ensure that banks could survive -- and continue lending -- even if the unemployment rate were to rise above 10% and home prices to fall by an additional 25%. The tests, which were conducted largely by economists and experts using mathematical models, seek to determine whether a bank would need more capital to continue lending under such circumstances.

How to analyze these stress tests

The problem now, though, is in trying to figure out how to analyze these stress tests. The government is concerned with figuring out which banks are "worthy" of help, true, but a bigger problem looms: How to shore up lenders without appearing to be helping lost causes.

It all goes back to the matter of perception. As long as there is the perception that the financial system is sound, it is likely to remain so. However, if these stress tests aren't spun the right way, things could get ugly again. And no one wants that, especially since risk appetite is starting to make a solid comeback in many markets.