Updated: Jun 30, 2020
New York | Last week the Federal Reserve Board made public the annual stress test results, a financial media circus that celebrates the bank stress test popularized by former New York Fed President Timothy Geithner. The Fed essentially confirms what we already know, namely that banks have largely suspended share repurchases and at some institutions are looking at limits on dividend payouts.
Banks had been conducting stress scenario analysis since the 1990s, of course, as part of the Basle process. The Geithner stress test of a decade ago was about perception, that is, confidence. It worked and the Fed tests went far to restoring confidence in banks. The subsequent iterations, however, have achieved little measured by clarity on risks taken by banks and the resulting Fed bank supervisory policy.