Revelation of Banking Stress Tests

Today’s lead story in The New York Times is titled, “U.S. is Planning to Reveal Health of Top 19 Banks.” It describes a plan by the Obama administration to disclose the results of government stress tests or to encourage participating banks to do so.

Apparently, things have been thrown out of skew by disclosures of certain banks, especially Wells Fargo and Goldman Sachs, of their plans to return money from government bailous due to predictions of a healthy first quarter. The rush to return taxpayer money has also been driven by restrictions on executive compensation from banks accepting TARP funds.

This chain of events clearly shows the law of unintended consequences. The actions of the government to restrain clearly excessive bonuses and executive pay has led to a pushback from banks determined to avoid the restrictions. The pushback from the banks separates the healthy ones from the unhealthy ones, at least on a comparative scale, because the unhealthy ones are unable to return any money.

As a result, investors can see what banks are healthy and what ones aren’t, and the resulting revelations will lead to a rush of funds away from the relatively unhealthy banks.

By revealing the results of the stress tests, the Obama administration is trying to avoid this flight of funds. The hope is that a positive stress test will maintain a bank’s support even if it is not quite 100 percent healthy.

It is reassuring that President Obama and his team are applying their programs in such a nuanced manner. We can only hope and pray for their continued success.