Last month, I did a blog entry questioning the bank stress tests, pointing out that the bar had been set too low. At the time, I raised the question of whether the tests had been put in place to stop the panic, not to fix the banks. More a political ploy than anything else.

Now, the Congressional Oversight Panel has put out a report saying that the stress tests need to be repeated. Basically, the report was saying more or less that the economic assumptions for the stress tests had been too rosy as unemployment rises higher than originally forecast. "The unemployment rate climbed to 9.4 percent in May, bringing the average unemployment rate for 2009 to 8.5 percent. If the monthly rate continues to increase during the remainder of this year, it will likely exceed the 2009 average of 8.9 percent assumed under the more adverse scenario, suggesting that the stress tests should be
repeated should that occur,'' the report says. "Stress testing should also be repeated so long as banks continue to hold large amounts of toxic assets on their books."

The report also seems to suggest that stress testing needs to become a permanent feature for banks to create a healthier system. "Between formal tests conducted by the regulators, banks should be required to run internal stress tests and should share the results with regulators. Regulators should have the ability to use stress tests in the future when they believe that doing so would help to promote a healthy banking system."

But how would banks take to that? The Macroaxis blog quotes a study from Deloitte showing that banks are terrible at risk management with very few of them conducting stress tests of their products.

What's needed is mandated stress testing and more rigorous oversight by regulators who would in effect become something like proxy directors.