Sheila Bair offers definitive assessment of stress tests

In a CNBC article, Sheila Bair laid out what is wrong with the Fed announcing the results of its stress tests.

The Federal Reserve's bank stress test results showed banks are stronger but didn't detail all the risks to investors, Sheila Bair told CNBC Wednesday. 

"It's good for the market to have that information" about individual banks and their ability to withstand a financial downturn but "analysts and investors should do their own due diligence.   Our regulators are not infallible," said the former head of the Federal Deposit Insurance Corp....

The fact is that the regulators are not infallible.

The fact is that without requiring banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details, analysts and investors do not have the data they need in order to do their own independent due diligence -- including running stress tests that are different than the Fed's.

The fact is that without ultra transparency, market participants are dependent on the Fed to properly assess the banks and to disclose all of the risks.

The fact is that when you combine the market participants dependence on the regulators' assessment and the fact that regulators are not infallible, you have a financial system that is prone to breaking down (see our current financial crisis).

The fact is that when market participants are dependent on the regulators, it creates a moral obligation that the taxpayers will bailout bank depositors, bond holders and equity investors.

Bair said the Fed's assumptions on housing-related losses should be looked at very carefully, and that certain risks were not factored in such as liquidity risk and interest-rate risk — what would happen if the Federal Reserve raises interest rates again?...