US bank stress test

US used a so-called ‘stress tests’ to see if the banks have sufficient capital to cope should the recession worsen. On 8th May, US announced the result, Ten US banks fail 'stress tests', only 9 survived. Ten of America's largest 19 banks need a combined $74.6bn of extra funds to boost their cash reserves.

Bloomberg’s attitude is negative towards the announcement. It reported ‘While the central bank found that 10 U.S. lenders need $74.6 billion in new capital to survive the longest recession since World War II, Chairman Bernanke said the results of the so-called bank stress test “should provide considerable comfort to investors and the public.” I think Bloomberg thought it was a big lie, how could the unhealthy of the bank be the comfort to investors?

The BBC News seems to be positive towards the news, it reported “the doomsday scenario that the banks' books have been subjected to is actually no worse than the current economic situation, and the fears of nationalization or of failure have more or less disappeared.” So it thought with the injection of $74.6bn, the bank will get away from the crisis.

The Wall Street Journal seems to be neutral, it showed several opinions of both positive and negative side. It reported “One question mark hanging over the tests is whether they will be perceived as tough enough. From the start, some economists and bank analysts argued that the Fed's worst-case economic scenario was overly rosy. Since the Fed informed banks of the preliminary test results, the government appears to have softened somewhat as banks pushed back.”

Because of the credit crunch, lots of banks face the problem of lack of capital, some of the banks have already indicated how they intend to raise the money they need by private means such as asset sales, rather than having to secure any additional government loans. And the pressure test results should go some way to lift the cloud of uncertainty that has engulfed the US banking sector by providing assurance that the sector would have the capital to handle further losses. Bank of America said it would raise the $33.9bn it needs through the sale of assets and other measures, while Citigroup, Morgan Stanley and Wells Fargo are to issue or exchange shares.

Conclusion
Giving the injection to banks to have enough capital to face some bad situations such as more credit default is a right way and only way to ease the situation at the moment. But the problem is US had already using quantitative easing—printing money, buying firm bonds, t-bills. Now American’s both trading and government are deficit, trillions of Dollar reserves are hold in other countries. I’m afraid even if the US’s economy recovers, it not only needs to increase the tax to pay for the debt, but also will face excess liquidity, which means higher inflation. If that really happens, other countries will not willing to hold the US reserves, and no one will continue refinancing for US. What’s more, if countries start to sell US bonds, US will face currency crisis. Even if that don’t happen, US need to increase the interest rate to fight the inflation, which is a big pressure for the foreign debt. Anyway, the future of US Dollar seems still not so optimistic to me.