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Jargon Watch: Stress Test

In an attempt to find out how banks are handling the current hard times, the government will soon start applying a "stress test," to see if the institutions can remain solvent if the economic situation worsens. What is this stess test? The Times writes today that the government will examine the books..


In an attempt to find out how banks are handling the current hard times, the government will soon start applying a "stress test," to see if the institutions can remain solvent if the economic situation worsens. What is this stess test?The Times writes today that the government will examine the books of the nation's 20 largest banks (which, amazingly, hold 95 percent of all the deposits in the entire country. Can I get a little trust busting from my boys at Justice?) and then run those numbers through a computer simulation. That simulation will attempt to divine what would happen to each bank "under Depression-like conditions, with unemployment surging to 10 or 12 percent, for example, or home prices dropping 20 percent further." That is the stress, in question.Once the government observes how the balance sheets perform, the Treasury department will have some idea if the banks can keep functioning, or if all the toxic assets on their books will eventually weigh them down. What the government does with that information, and what it does with banks determined to have failed the stress test, remains to be seen. A bank that failed is not yet a failed bank, but it's close. We've seen what happens when people even mention the world "nationalization," but if these banks have been deemed too big to fail, something's got to give.Whether or not the banks pass or fail, and even what that means, will be held in secret by the government, until someone leaks it, sending banks' stock prices tumbling even further.