In her 2017 Jackson Hole speech, Fed Chair Janet Yellen confirmed Too Big to Fail is alive and well. She observed:
Finally, the largest U.S. banks participate in the annual Comprehensive Capital Analysis and Review (CCAR)‑‑the stress tests. In addition to contributing to greater loss-absorbing capacity, the CCAR improves public understanding of risks at large banking firms, provides a forward-looking examination of firms’ potential losses during severely adverse economic conditions, and has contributed to significant improvements in risk management.
CCAR improves the public’s understanding of the risk at large banking firms by reassuring the public the taxpayer will bailout the banks.
How does it do this?
Recall banks are black boxes. Banks don’t disclose their exposure details. This means it is impossible for an independent third party to assess their risk.
In 2013, Ben Bernanke confirmed this statement in a speech when he said the Fed still didn’t have all the data it needed to independently run the stress tests. Without the ability to independently run the stress tests, the Fed is in no position to confirm what the banks are telling them are the results of this test.
Amazingly, in the same speech, Bernanke conceded this too was true.
So what information is the Fed conveying by saying the banks passed a stress test?
It is simply reiterating the pledge to bailout the banks. As Bernanke said in 2009 with the release of the first stress test results, the Treasury will provide as much capital as is needed to keep the banks solvent.
After all, there is a moral obligation to bailout the bank investors who don’t have access to the information needed to assess the banks when the bank regulators say solvency is not a problem even “during severely adverse economic conditions.”
Regular readers know I think the practice of announcing the stress test results must end. Until it does, banks will never be subject to market discipline.