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Stress Tests – Inoculation or Gimmick?

11 May 2009

Are the US government's much-ballyhooed bank stress test results improving transparency, risk management, and therefore building confidence in the ultimate solvency of the system's largest institutions?

Or, are the stress tests a largely political exercise, tantamount to putting a Band-Aid over a gangrenous limb?

Will the burst of confidence that the government's official verdicts on 19 large banks seem to have instilled in markets since the beginning of May, prove all too fleeting?

Comments (6)

"Stress test is not a gimmick. The only way to regain investor confidence is if they see an independent body policing and safe guarding their retirement fund and savings."

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Comments (6)

  • Stress test is not a gimmick. The only way to regain investor confidence is if they see an independent body policing and safe guarding their retirement fund and savings. In fact in Australia an independent stress test should also be conducted. This is because almost all banks have exposures to toxic assets that may result to banks under reserve. There are also RMBS originated in Australia and most Australian banks and foreign banks have exposure to US and local RMBS.  Exposure to toxic assets was a result of poor operation, IT (trading and risk system) and risk management in the past 5 years in the industry. This was also a result of dishonest portfolio managers and traders conspiring with IT and operation in non-disclosure of CDS and other derivatives to head office or management. A good example is Socgen Australia where even the head of credit and head of audit put a blind eye for the past 4 years. This has been happening as well to Deutche Bank, UBS and other foreign banks. The big 4 also have the same practice. The only difference is that they do not have the same level of operational risk because local banks do not have overseas operation.

    Gary 25 May 2009

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  • JP Morgan is also a good example.....The big 4 had their own stress tess early this year.

    The stress test have a double blade effect to foreign banks. The initial impact investor doubting the brand name of the bank however they will end up with clean balance sheet. Once their balance sheet is clean they are now in a position to wisely use their capital to a more profitable business and  putting it in a region where they can still find room to get better margins.

    Foreign banks is Australia are late comers on other business banking operation and business hence they will think twice if it is still profitable to have their operation located in Australia. This will result to employees being displaced.

    They are actually expanding their business in China where they think they can still have  a level playing field not just in wholesale banking but in private banking and asset management business as well.

    If the operation and IT support in Australia performed well in the past they may consider maintaining its operation here in Australia but for the likes of Socgen that did not have a good operation and effecient IT support in the past 4 years there is no reason for them to stay

    Gary 26 May 2009

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  • Particularly if they have little sales margin from their sales desk and the trading portfolio are not making good profits since 2007.

    It is more profitable for them to just have a satellite office or team here in Australia. This is a business strategy that they can explain to their share holders.

    In the future the likes of Socgen may come back if the operation in Hong Kong failed however this is not the case right now because they are expanding rapidly across China. Also it is more meaningful for them to come back when the operation and IT support are all new staff with better quality skills. When traders, portfolio managers, and sales team are new.

    Gary 26 May 2009

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  • Weakness in transparency, operation and risk management to foreign banks did not just happened in 2008. This is a build up from years prior 2008. Hence you will find that appropriate action from foreign bank head office/managmennt is already over due.

    Portfolio exposed to toxic assets was managed by one portfolio manager to another over the years hence it was difficult for the last portfolio manager to exit legacy positions in 2007. The lack of honesty and tranparency from the front desk risk manager/business analyst and portfolio manager to report the full position of the fund to the head office aggraated the situation.

    Gary 26 May 2009

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  • Weakness in transparency, operation and risk management to foreign banks did not just happened in 2008. This is a build up from years prior 2008. Hence you will find that appropriate action from foreign bank head office/managmennt is already over due.

    Portfolio exposed to toxic assets was managed by one portfolio manager to another over the years hence it was difficult for the last portfolio manager to exit legacy positions in 2007. The lack of honesty and tranparency from the front desk risk manager/business analyst and portfolio manager to report the full position of the portfolio to the head office aggravated the situation.

    Gary 26 May 2009

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  • It is very important and in fact critical to a banking business with overseas operation to have honest employees with excellent business ethics that upholds both the customer and share holders interest in the front office. It is also critical that there are excellent skills from operation and IT support. The implementaion and updating of system (trading and risk) are major tasks of their IT and operation team. Past experience does not show efficiency from the support groups. There was also lack of quality skills and knowledge from the credit group. While the risk monitoring staff and portfolio manager in the front office lacks honesty and transparency.

    Gary 26 May 2009

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