US Federal Reserve chairman Ben Bernanke has told Congress that the recent stress tests done on US banks has shown that the American banking sector is not in the same rickety conditions as Europe and that they could withstand any disastrous downturn in the US economy. "What we found is all the banks essentially were able to meet a reasonable level of capital, even following the losses associated with such an event," Bernanke said.
Don't believe it! The tests were a scam and structured in a way that US banks would come out smelling like roses. Former IMF chief economist Simon Johnson is scathing about them in this piece in Bloomberg where he says the Fed was assuming that Europe would only have a mild recession and that only one bank would fail which, when you think about it, is a rarity. Based on what we've seen so far, either many banks fail or they all receive bailouts.
But the real problem remains how much debt US banks are carrying. Sheila Bair, chairman of the Federal Deposit Insurance Corp told MarketWatch the tests were looking at the wrong thing and had a leverage level of just 3 per cent, which means a debt of 32 times its equity, when US banks had debt levels closer to 4 per cent. "During the height of the financial crisis, all of the investment banks that got into troubled had leverage ratios significantly below 4 per cent."
In other words, she's saying US banks are more vulnerable now than they were in the lead up to the financial crisis.