When the US government announced in 2009 that it was launching stress tests for the country’s largest banks, it seemed like a master stroke. The financial system was reeling from crisis, investors were losing faith in the health of American banks and taxpayers were furious at being asked to bail out Wall Street. By conducting the stress tests — detailed public examinations of the banks’ books — the US Federal Reserve created an aura of transparency and accountability. That immediately helped to bolster market sentiment and lessen the sense of public anger (a touch).
The success of the exercise prompted American officials to urge Europe to also implement public stress tests. (Sadly the Europeans failed to heed this advice — until recently.)
But while the stress tests of 2009 worked, there is another question that policy makers now need to ask: have the tests outlived their usefulness? Ask most senior Wall Street bankers and the answer is likely to be a resounding “yes”.