The Fed Flunked It’s Own Stress Test

In the aftermath of the failure of Silicon Valley Bank and Signature Bank, many rushed to blame their demise on a lack of regulation. In particular, they focused on the fact that these banks were not required to undergo a Federal Reserve stress test.

Indeed, small and midsize banks are exempt from the stress test requirement. Did that lead to the current banking crisis?

This issue came up recently when Michael Barr was testifying before Congress. He serves as the Fed’s vice chair of supervision. Sen. Joh Kennedy (R-La.) asked him a poignant question.

If you had stress-tested Silicon Valley bank in 2022, it wouldn’t have made any difference, would it?”

Barr claimed he didn’t know the answer.

Kennedy then pointed out that the Fed didn’t test any bank for the problem that took down SVB. “I’ve read your report,” Kennedy said.

You stress-tested these 34 banks for falling GDP, spiking unemployment, and defaults in commercial real estate, isn’t that correct?”

Barr agreed and started to say that “in a typical adverse scenario for banks, we’re testing falling interest rates.”

But as Kennedy pointed out, that’s not our problem today.

The problem is inflation, high interest rates and loss of value in government bonds, isn’t it?

Barr “completely” agreed.

That means, as Kennedy pointed out, the Fed tested for the wrong thing in 2022.

After the round of stress tests, the mainstream media trumpeted them as a big success. As Peter Schiff put it, they told us “we could all sleep soundly knowing that all these banks have passed the Fed’s stress test.”

Nobody bothered to actually look at the assumptions that were in the stress test. I did. I looked at them. And I saw that they were testing for the wrong thing.”

I warned on Twitter precisely about what the #Fed failed to test for almost three years ago. So instead of relying on the Fed all #Congress or investors had to do was follow me on Twitter and nothing that happend to #SVB or #SignatureBank would have come as a surprise.

— Peter Schiff (@PeterSchiff) March 28, 2023

The original tweet was in June 2019.

That’s it. I nailed this three years ago. The idiots at the Fed, and these guys are supposed to be the smart ones, but they were too dumb to see what I tweeted about three years ago. I didn’t tweet about it because I was so smart. It’s just they were that dumb to have missed something so obvious.”

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