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Bank Stress Tests

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Bank Stress Tests

Republished from The T-Report: “Peter Tchir’s T-Report”
Pretty much a snooze. A little surprising that Citi has done so well while JPM slipped, but will take a closer look and see if anything from the data and results leads to trading thoughts, but initial reaction is that there isn’t much here. Maybe BAC and C get a pop as people think they will be able to pay out bigger dividends or do stock buybacks (I doubt they will be allowed to do too much) and JPM might be hurt as it is everyone’s darling yet this might be enough to give the Fed an excuse to continue to punish Dimon and not let him announce anything exciting.

I think we can expect to see good results on the stress tests as banks understand how they work and can ensure good results.

The tests are still done on a “snapshot” basis. So it is only 1 day that counts for all the tests. It seems like it would be easy to put on some “stress reducing” positions for that day if you felt like it. Buy some puts, short a block of IG index, and it counts on the stress test, and if you blow out of the positions the next day, the cost was marginal. I have always believed that tests that are based on a random sampling of days would be much healthier for the system (to the extent the tests do anything in the first place).

Then, what really amazes me is the amount of time it takes. When the banks conduct the test they basically have over 3 months to run the analysis. I’m not saying the stress tests of this size should be a quick calculation, but it seems to me that this sort of scenario analysis should be able to be finished in a week. Maybe banks can do that. It would be easier to get comfortable that there are no more “whale” trades if banks had the ability to run those stress tests very quickly. Many hedge funds can.

Ironically (or maybe not ironically) the Whale trade had been great in the stress tests the way it was designed, and maybe that is why JPM did worse this time around.


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