Banks: Pass or Fail?

Today’s Wall Street Journal has an op-ed piece about the ongoing calamity befalling banks, on the heels of the Fed’s announcement that a new round of stress tests is in the works to measure banks’ exposure to the Euro Zone disaster. Included in the test is an estimate of revenues, losses and capital losses were there to be a market shock.

Designed to give investors more certainty about the risks they face, banks and other large institutions, numbering 19 in total, must submit capital plans by January 9, 2012. Banks are eager to pass the test so they can raise dividends, repurchase stock or be forced to raise more capital.

The last three months, however, already have signaled a market shock, as measured by a severe spike in volatility, suggesting that investors are extremely nervous, if not quite yet in panic mode. The chart accompanying the piece in today’s WSJ shows volatility of bank stock prices at a level dangerously close to the level in the Great Depression. Because banking depends on investor confidence, lack of said confidence causes investors to panic and pull out money, leaving the banks with little to lend. Investors may be saying that banks are barely passing.