The Fed’s annual stress tests and capital analysis amount to a contest between the regulator’s models of large banks in a crisis and those of the banks themselves. The latest disclosures suggest troubling flaws in the Fed’s calculations.
Operational risk capital for US banks is the highest in the world but the Fed resists formally testing op risk in its stress tests. One reason might be that the Fed would have to explain why the charges need to be so high.
Why can't the ECB bring itself to stress test banks for deflation? I was thinking about this question when I remembered an episode from the past. Just over ten years ago, I took a train from Frankfurt to the sleepy spa town of Wiesbaden. It was the sort of place where a lone taxi is… Continue reading..