Stress Tests: Going Through The Motions

BLOOMBERG VIEW: Most banks would fail a real stress test. "This week, the Federal Reserve will present the results of stress tests designed to ensure that the largest U.S. banks won't turn the next financial crisis into an economic disaster. There's just one problem: If the tests were realistic, most of the banks would fail....Unfortunately, the Fed's approach ignores a lot of the horrible things that actually happen in crises....The Fed also makes a passing grade too easy to achieve....It doesn't have to be this way. The Bank of Canada, for example, includes the effects of credit freezes and contagion in its stress tests. If the Fed did the same, and checked its results against a market-based approach like that of NYU, its conclusions would be a lot more believable." The Editors.