For years, many – and certainly this website – had mocked both European and US stress tests as futile exercises in boosting investor and public confidence, which instead of being taken seriously repeatedly failed to highlight failing banks such as Dexia, Bankia and all the Greek banks, in the process rendering the exercise a total farce. The implication of course, is that regulators, thus central bankers, openly lied to the public over and over just to preserve what little confidence in the system has left.
Now we know that far from merely another “conspiracy theory”, this is precisely the policy intent behind the “stress tests” – as Reuters reports citing a paper co-authored by a Bundesbank economist, “banking supervisors should withhold some information when they publish stress test results to prevent both bank runs and excessive risk taking by lenders.”
In other words: lie.
Essentially the authors recommend instead of being a useful measure of banking sector health, all stress tests should do is boost skepticism in the entire financial system since bankers are too scared and too insecure to admit the full extent of the ugly picture.
Or, as Jean-Claude Juncker put it: “when it gets seriousm you have to lie.”
Why is this emerging now, and is it, well, about to “get serious”?
As Reuters notes, European banking authorities are due to carry out a fresh round of stress tests next year as they try to restore investor and depositor confidence in the continent’s banks after the financial crisis. So the answer is probably “yes.”
The paper, presented at a conference in Mannheim last week but yet to be published in its current form, says stress tests should be used to influence depositor behaviour and warns against giving too much away.”
Said otherwise, regulators should outright lie to the public. Why? “If depositors know from the watchdog that banks are in trouble, they will withdraw their cash, threatening lenders’ survival and causing the panic the supervisor is trying to avoid, the paper said.
Perhaps someone needs to explain to the Bundesbank central banker what the word “regulator” means: a quick scan through the thesaurus does not reveal “liar” as one of the synonyms. That, however, is irrelevant: the authors push on saying that the amount of information disclosed by supervisors should decrease the more vulnerable the banking sector is expected to be.
Full article: Central Banker Urges Lying To The Public About Bank Health (Zero Hedge)