There is a key line in the stress test document. It reads: "Banks may face incentives to be overly optimistic about the impact of stress scenarios on their capital position [in order] to achieve a more favourable result in the stress test."
We know that banks were not only fooling the regulator but also themselves in the run-up to the financial crisis. The new regime looks robust.
On its own, though, it won't prevent banks failing, so the final weapon in the regulators' armoury must and will be the orderly winding-up of parts or the whole of banks – with shareholders and bondholders, rather than depositors or taxpayers, taking the pain.Reuse content