For those of us in the real world familiar with real live trading, there is a huge difference between theory and reality. I was invited by a very well-known university to observe a program pilot designed to train people to trade in banks funded by banks. They rented a hotel and took many rooms with each room set up as a pretend bank dealing desk. The professor would then control the screens and pretend to be the central bank. If the students did not respond according to theory, they failed. I was speechless that the banks funded this project and it was just a joke.
Well, welcome Bank Stress Tests. You will not believe how they are designed. You guessed it – on theory. The people who designed this fiasco are again void of trading skills. This test assumes a perfect market with infinite buyers. They do not comprehend even what a PANIC is no less how to trade during a PANIC. In the middle of such chaotic times of crisis, they PRESUME there will be buyers when needed and ALL the banks will be forced to sell exactly the same instruments that everyone else will have to sell all simultaneously! Where will this mythical bid appear? Where’s the risk test in that? And, 20% of the banks failed even under such perfect conditions! The ECB Stress Tests revealed under PERFECT conditions that EU Banks Face Capital Shortfall. With capital raising, this has been reduced under this perfect world scenario by selling stock but honestly, why would you buy stock that the stress test reveals will evaporate into thin air?. Can you imagine what will happen in real-time? They cannot raise enough money to fix this one.
