We have all seen things about stress tests in the news this week. Let's first define these so called stress tests before we figure out how they impact the market and financials. Stress tests are a way for the government to find out which banks need to bolster capital in case the economy dives down again. There has been talk from some banks (GS and MS) that the bailout money is no longer needed for them. Before they are allowed to pay back money, the government has decided to run 'tests' to determine if they have enough capital to pay back bailout funds and still whether another downturn.
These stress tests, besides evaluating capital, are supposed to show any weaknesses in banks. These banks will then have to show a plan and commitment to regain their financial health. Overall, this is supposed to restore confidence in the financial sector by showing investors how well off banks really are.
Today, the government announced a two tier model. Stress test criteria were released today and results will be shown in another week and a half. Most banks are thought to have enough capital to withstand any adverse economic conditions given the criteria. These tests will certainly show it. Favorable capital by these banks could show another rally in the market. Poor results could create another buying opportunity. Either way, it will be a time to make cash money.
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