Be Wary of Bank “Stress Tests”

School of Management Senior Lecturer Mark T. Williams, a former Federal Reserve bank examiner, says the public should be wary of results from the “stress tests” being performed by the Fed on the nation’s 19 largest banks.

“Stress testing is only an estimation tool.  Such tools were used by major banks as they overdosed on CDOs in 2006-2007, and these same types of risk models can turn out to be precisely wrong.

“Stress testing results should be used to shore up capital position, not as a means to justify a reduction in capital.  Given their previous track record of letting banks overdose on risk, I am concerned about the true usefulness of the stress-test results.”

Contact Mark T. Williams, 617-358-2789, williams@bu.edu

Post a Comment

Your email address is never shared. Required fields are marked *