The results of the bank stress tests are in and once again virtually every single bank passed.  Central bank regulators are running around saying the banks are simpler, safer and more transparent than they were prior to the 2007 financial crisis.

Is there any reason to believe them?

Regulars readers know my answer is “NO”.  Since 2009, I have pointed out banks are still opaque black boxes and it is impossible for the market to confirm what the regulators are saying.

Turns out I am not alone in my condemnation of the stress tests.

Kevin Dowd, a professor of finance and economics at Durham University and a senior fellow at the Adam Smith Institute, put out report in which he argued banks are simpler, safer or more transparent.  In fact, he argues:

The stress tests are about as useful as a cancer test that cannot detect cancer. They seek to demonstrate a financial resilience on the part of UK banks that simply isn’t there. Our banking system is an accident waiting to happen.

Naturally, his local central bank, in this case the Bank of England, refuted the charge:

and defended the stress tests as being as tough as during the financial crisis.

Of course this exchange between Professor Dowd and the Bank of England highlights the fundamental problem.  Banks are opaque.

If banks were transparent, every market participant could do their own stress test on the banks.

If banks were transparent, the Bank of England wouldn’t have to be seen as encouraging investment in the banks.  By encouraging investment, the Bank of England is creating the moral obligation on the part of the taxpayers to bail out the banks in the future.  Why? It can be reasonably assumed investors relied on the Bank of England’s assurances the banks could withstand financial armageddon.