STAFF NEWS & ANALYSIS
Fed Says Top U.S. Banks Must Hold Sizable Capital Buffer
By - April 25, 2009

The top 19 U.S. banks need to hold a "substantial" amount of capital above regulatory requirements to weather a potential worsening of the economic recession, the U.S. Federal Reserve said on Friday. The Fed said so-called "stress tests" that regulators conducted at major banks are aimed at ensuring the institutions have enough capital in reserve to continue to lend in potentially bleaker conditions, and are not a measure of banks' current solvency. "It is important to recognize that the assessment is a 'what if' exercise intended to help supervisors gauge the extent of capital needs across a range of potential economic outcomes," the Fed said in a white paper outlining the methodologies regulators employed. The concept paper is a precursor to release the results of the stress tests on May 4. A closely-watched outcome of that exercise will be to determine which of the banks, which include Citigroup Inc (C.N), JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N), need to raise more capital, possibly with government help. The paper did not quantify the size of the buffers banks may need to build, or say how the results would be presented. – Reuters

Dominant Social Theme: Banks must become strong.

Free-Market Analysis: Why? Why must American (and some European) banks pass a stress test? If a major bank gets sick – and seemingly all of them were terminal not long ago – it will be made well again by central bank money-printing. The stress testing makes about as much sense as distributing paper money only through commercial banks. Why not distribute money to individual entrepreneurs and small businesses? Why does the money that central banks print have to be distributed through banks alone?

Heck, just grant major tax rebates to individuals who need it the most and this latest economic crisis would subside. But that is not how it works, apparently. In fact, the current economic environment only mimics a free market. Once upon a time there were no central banks and various entities including restaurants, hotels and money warehouses stored gold and issued notes. But today, the only entities that get to hold money are "banks" and now they have to hold enough "money" so they won't go insolvent in case of a run.

The money industry has seemingly been hollowed out by a determination of the monetary elite to create a system in which banks are merely distribution points for central-bank paper money. But the problem with this system is that the money being printed is debt money and the central banks have no idea how much of it to print, let alone how much is too much.

And so we arrive here. Six months ago the entire Western global banking system was technically insolvent. Today it is perhaps a little bit better, though probably not much. But the drama that swirls around the banks seems to us similar to that which has swirled around innumerable other crises – crises that when looked at closely are perhaps less than what they seemed.

What difference does it make how much a bank has in terms of reserves? The reserves are not gold, nor silver. The reserves are paper money reserves, and the money is debt money. The banks are being stress tested to figure out how much debt money they hold and whether or not they should hold more of it.

After Thoughts

Do citizens of the West have confidence in their banks? Will they have more confidence in them if they survive "stress tests?" The question is a fair one given the nature and composition of the current industry. Given all that has happened to the financial system, it is difficult to see how anyone following the banking industry will believe these tests will make any difference one way or another. The curtain has been stripped away from the manipulators of the financial industry over this past year and many are well aware of who is moving the levers and making the decisions. It is not the banking industry that needs stress tests, but central banking. Yes, the answers to the stress tests are already in. It doesn't really matter, given what has already occurred. If it's big enough … a bank that is stressed out will be bailed out.

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