Stress tests don't mean the banks are OK

In his Bloomberg editorial, Mark Whitehouse debunks the notion that passing the Fed's stress tests actually says that the banks are OK.

Mr. Whitehouse along with individuals like Professor Anat Admati would argue that the banks are not OK until such time as they a) pass the stress tests and b) have book capital equal to 20% of assets.

Regular readers know that you still don't know if the banks are OK if both of these conditions are met.

Why don't you know?  Because in the absence of ultra transparency and ongoing disclosure by each bank of its current global asset, liability and off-balance sheet exposure details, you don't have the information needed to independently confirm that the banks are OK.

Please recall that at the beginning of the financial crisis, for all practical purposes, bank financial reporting was rendered meaningless (a fact highlighted by the OECD).  This was the direct result of the suspension of mark-to-market accounting, the adoption of mark-to-unicorn (thank you Bloomberg's Jonathan Weil), and the adoption of regulatory forbearance under which the banks were allowed to engage in "extend and pretend" with their non-performing assets and create "zombie" loans.

There is a reason that the Bank of England's Andrew Haldane refers to banks as "black boxes".  Only management and the bank regulators know what is inside.  Nobody else does.

Now, would you trust management and the bank regulators to provide an accurate representation of their true financial condition?

I don't for a simple reason.  Until a bank provides ultra transparency (this was the industry standard as recently as the 1930s and signaled that a bank could stand on its own two feet), the bank's management is waving a big red flag saying they have something to hide.