Economics

Walk the Line

Regulators told investors Thursday they will detail bank stress-test methodology well before the results are released to the public.

Story Highlights:

  • In contrast to the Treasury's earlier fumbling communications devoid of details, the feds seem to be learning to make their plans for bank stress-tests clearer to investors up front.
  • The government announced some specifics Wednesday then followed up Thursday by saying they'll release the exact stress-test methodology before they release results.
  • Ham-fisted messages may still surface, but as the government gets better at walking the line, increased transparency should help calm markets.

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In a federal official's very own personal "Three Bears" hell, volatile markets demand "just right" promotion of the public porridge—the government must avoid saying too much before they're ready and too little, too late. Correspondingly, the upcoming federal bank stress tests might test the feds' communication skills more than they test banks. (Thursday's discussed this concept in detail.)

As the date for stress-test disclosures approaches, markets are getting a bit skittish. But, in contrast to the Treasury's initial fumbling communications devoid of details, the feds seem to be learning to make their plans clearer to investors up front. Regulators that, instead of secretly testing banks and taking action without clear justification, they'll reveal their reasoning in greater detail than first anticipated. Then Thursday, the Federal Reserve and other regulators responsible for the evaluation they'll release a paper detailing stress-test methodology April 24th—a little over a week before final results are revealed to the public May 4th.

Knowing specifically how the feds are evaluating banks before digesting the results could smooth the run up to May 4th—decreasing uncertainty and allowing markets to more gradually price in likely results. Some questions over just what action the feds are likely to take will remain until the official proclamation. But the feds said they'd give specific details of any on May 4th, hopefully quickly dispelling speculation.

With investors closely scrutinizing every government action, clear communication is a must. Ham-fisted messages may still surface, but as the government gets better at walking the line, increased transparency should help calm markets.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.