Bank Stress Test

Tomorrow we will hear a lot about the government's effort to perform stress tests on U.S. banks. The headlines will begin with the government's release of a white paper detailing the testing methodology, and then continue as the results are consumed by analysts, politicians, and pundits.

As I write this, the banks and the government are continuing to fight (right up to the last minute) about how the test results should be released. This fight is about which numbers will be used, and how they will be presented. The banks want to look as good as possible, while the government wants to increase public confidence, so I'm not really sure what they are fighting about. I imagine the fight goes something like this:

Banker "Look, we don't want to name the report 'Stress Test' anymore. We prefer 'Review of Bank Awesomeness'."
Government "That's a great idea, I just wish we thought of it at the beginning. I can't look bad by changing it now. So I'm going to say 'No Way'. But I reserve the right to use it anyway."
Banker "Fine. We also want to withhold actual financial data at our choosing. To make up for the empty space this will create in the report, we propose releasing a survey of employee stress indicators."
Government "So you want us to report on how stressed out your employees are? That might just work. Can we give them free doughnuts and coffee before they take the survey? It might make for better results. You guys are really good at this!"

If both the government and the banks have incentives to increase public confidence, then how can we expect them talk about loan losses, reductions in lending, mortgage defaults, etc.?

The real stress test is simply continuing to listen to the government pretend like they know what they are doing. Maybe a Stress Test Czar would help?! That sure sounds official and important!