Bank Stress Test Results Out: Were the tests successful?
Written by Shabduli Purav (contact - e-mail) -- June 8th, 2009 |
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The results of the stress tests conducted on some of the nation’s largest banks were announced on the 7th of May. The tests were intended to distinguish the ‘strong’ banks from the ‘weak,’ and to instill confidence in the market. Of the nineteen banks that were stress-tested, nine banks were deemed ‘strong’ while ten were asked to raise more capital in case the recession runs deeper and longer than expected. Some experts have argued about the thoroughness of the tests. Meanwhile, some banks have suggested that the tests had overly pessimistic assumptions, and as such they do not agree with all the assessments.
These debates led me to wonder – how did the results impact investors and average consumers? Were the tests successful in achieving the objectives?
I assessed investor reactions by comparing the stock price of three ‘strong’ banks (JP Morgan Chase, American Express, Capital One) and three ‘weak’ banks (Bank of America, Wells Fargo, Citigroup). Chart 1 below shows this comparison. The stock price of all banks, including the weak banks, increased leading to, and following the announcements. The stock prices have since decreased, but remain higher than pre-result prices indicating improved investor confidence. However, the interesting point to me was that all the banks seem to trend together. It, thus, looks like investors are still not differentiating between banks.
How about consumers: are they more confident about banks and are they differentiating between banks? To assess average customer sentiment, I decided to look at the number of online visitors. My hypothesis was that if people care about the results, there would be an increase in online visitor volume for strong banks and a decrease for weak banks.
Read as: In the week of May 17-23 Chase had 1% more visitors to its website than the average number of visitors during April 12-25.
There was a dip in online visitor volume across banks in the week that the results were announced. This could just be due to caution prior to the results. The following week, online visitor volume increased across banks indicating that people were happy with the results or at the least not overtly concerned. Again, all banks trend in similar directions. Looking at the two charts above, I would have a hard time distinguishing a ‘strong’ bank from a ‘weak’ bank.
Experts may continue debating about the validity, need, and timing of the tests, I however think that the tests were successful in instilling confidence but not in distinguishing banks.
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June 9th, 2009 at 10:18 am
You nailed it in the last sentence. I read the whole thing thinking there isn’t really a correlation between the trends and whether banks are strong or weak. And yes, investor confidence was shored up following the tests, because the results weren’t considered that critical - even for the weak banks, especially BofA, which has a whole lot of problems to deal with.
August 21st, 2009 at 2:08 am
Your article was very well written, I am very like it, I wish you happy every day!
October 28th, 2009 at 9:21 am
Yes !Very interesting article!