Preliminary Q3 2009 Bank Stress Test Results

This is a guest post by the Institutional Risk Analyst.

“It is now almost twenty years since J.P. Morgan and Company, its associates and its satellites attempted to induce Congress to create a central bank of issue instead of the Federal Reserve System. They were determined that control of the national purse should remain in New York. The theory underlying the proposed system that the several sections of the country should control their own finances was preposterous. To them it was anathema. Ten short years later the same group, represented by the same agent who had led their lost cause in Washington, took charge of the Federal Reserve System. For practical purposes the system was transformed into a central bank, and was manipulated to the very ends that its authors had sought to guard against.”

The Mirrors of Wall Street, Clinton Gilbert, 1933
stress_testWe want to update our readers on the preliminary Stress Index results for the US commercial banking industry in Q3 2009. Last week, when The IRA Bank Monitor had gathered some 5,000 bank CALL reports from the FDIC’s central data repository, the Stress Index stood at just 6.45 vs. the preliminary stress level of 6.7 last quarter. That preliminary result for Q2 2009 was when we had some 7,000 bank CALL reports gathered, just before the FDIC press conference.

Since we initiated our automated tool for gathering FDIC CALL reports and grinding preliminary stress ratings, we’ve cut three weeks off of the wait time to access our Stress Ratings. But today, with 6,936 FDIC bank CALL reports in the house, we have a preliminary Stress Index score of 7.46 for Q3 2009, significantly higher than the Q2 2009 preliminary results, like 10% higher. The seemingly favorable Stress Index number last week for Q3, when we had just 5,000 banks in hand, was a head fake.

In fact, the far worse result for our Stress Index survey vs. Q2 suggests that levels of stress in FDIC insured banks are continuing to build, from multiple factors, even as the subsidies that make the large banks look less risky are being withdrawn. In Q2 2009, when we added the largest banks and all thrifts to the ratings survey, the final score was just 3.11 or less than half of the preliminary Q2 Stress Index score, which exclude the large banks.

Looking at Q3 2009, we expect to again see the subsidized money center banks push down the overall Stress Index results when all of the CALL reports are available in standardized form in about three weeks, just not as much. Thus the overall Stress Index score for the US banking industry during Q3 2009 could be significantly higher than in Q2 2009.

Click the link below to see the IRA widget that displays the preliminary Stress Index rating in real time, as the CALL reports become available on the IRA web site.

Subscribers to the professional version of the IRA Bank Monitor and IRA Advisory Service can see individual Stress Ratings for banks that have submitted CALL reports to the FDIC. Click here for more information. (Disclosure: Wall St. Cheat Sheet is a business partner of Institutional Risk Analytics.)

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