Stress Test Results Should Stay Private

An article I read today mentioned that the federal government was contemplating releasing the results of the stress tests it is conducting on many of the nation’s financial institutions. Apparently, the government is taking a page from the Sen. Charles Schumer playbook on “How to create a run on a bank.”

Last fall, when the government called the CEOs of the nation’s largest financial institutions into a conference room at the Treasury Department, it asked that all of them take funds from TARP. This was done to avoid creating a situation where the weaker banks — the ones that needed the money most — were identified by the large checks in their hands as they walked out of the building.

It may just be me, but don’t these two policies contradict each other, at least a little? I get that the two policies were created by two different administrations, and that President Obama is all about transparency. In most cases, sunlight is the best disinfectant. I’m all in favor, for example, of the Federal Reserve holding regular press conferences. Doing so would eliminate the market swinging wildly whenever Ben Bernanke engages in small talk at a cocktail reception.

But there is a reason that the FDIC did not start publishing the list of “problem” banks the moment President Obama finished the oath of office. There is still some information that has to remain private.

If the results of the stress test indicate that a financial institution does not have enough capital to weather further economic erosion, then it should be wound down. No more shotgun marriages, no more bailouts. Doing this will avoid having to prop up the institutions that are failing and also avoid inciting panic.

Should a bank choose to release the results of its stress test on its own, fine. But the government should not be in the business of publishing information that could incite a run on an institution.