Voluntary Stress Testing

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I used to run. Now hiking, biking, and ballroom dancing are my preferred forms of exercise. You have to stress your body to build and preserve muscle. Stress testing is good for the financial system, also. Two recent stories show that the US market is training for triathalons while the Eurozone is still shopping for track suit that makes them look slimmer.

Quantum Dawn II sounds like a sequel to a 1980s science fiction film. It is actually a voluntary exercise in simulating a coordinated cyber-attack on US financial markets. It is a sequel, though – the original simulation was run in 2011. The effort is a voluntary attempt at preparedness. While regulators participated in last Friday’s exercise, it was the idea of SIFMA, a securities industry group. Deloitte acted as independent judge and collected findings.

Meanwhile, the ECB is moving forward, haltingly, on stress testing 130 systemically important banks. But preliminary to that exercise, a round of asset quality reviews will be performed.

I’ve written about this before. Postponing the stress test until after the AQR process is complete benefits the banks, not the investor. The risk premium to invest in  a Eurozone bank is now artificially higher than it should be. It is as if the owner of a racehorse came to you and said, “My horse might have cancer, but I am not going to run the test until after the next 10 races. Please bet on it anyway.

If that is the attitude of the regulator, I know when to expect the voluntary cyber-stress test in European markets. Never.

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