Comments on: Stress testing of banks and policy implications http://www.ebrdblog.com/wordpress/2009/07/stress-testing-of-banks-and-policy-implications/ European Bank for Reconstruction and Development Fri, 11 Nov 2011 09:53:14 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: Albert http://www.ebrdblog.com/wordpress/2009/07/stress-testing-of-banks-and-policy-implications/comment-page-1/#comment-16 Albert Sat, 05 Sep 2009 05:21:41 +0000 http://www.ebrdblog.com/?p=574#comment-16 None of this addresses the fundamental problem. Asset prices and cash flows supporting them are completely unsustainable. These injections of capital will not address the problem of tapped out demand in all spheres of any economy the banks are exposed in. Two things will begin to occur forced defaults (due to cash flow shortages) and planned defaults (due to entrepreneurial decision making). The latter will increase in scope when not if the decline in capital makes it feasible to pull out working capital of a project in order to recreate it or reacquire it or some other project in the future at a lower cost. The more support given to banks to support asset prices the steeper and longer the decline in those asset prices must be to justify actual risk capital entering the market. 1991-1998 when burdens became unbearable that is precisely what happened. Viable companies pulled in their working capital until insolvency and were rebought at a lower price by their own entrepreneurs. Wage arrears and other aspects are completely similar to what happened then but they are ignored. My guess is once one or a few countries default the ramifications on asset prices will be irreversible and there will be a resolution. None of this addresses the fundamental problem. Asset prices and cash flows supporting them are completely unsustainable. These injections of capital will not address the problem of tapped out demand in all spheres of any economy the banks are exposed in.

Two things will begin to occur forced defaults (due to cash flow shortages) and planned defaults (due to entrepreneurial decision making). The latter will increase in scope when not if the decline in capital makes it feasible to pull out working capital of a project in order to recreate it or reacquire it or some other project in the future at a lower cost. The more support given to banks to support asset prices the steeper and longer the decline in those asset prices must be to justify actual risk capital entering the market.

1991-1998 when burdens became unbearable that is precisely what happened. Viable companies pulled in their working capital until insolvency and were rebought at a lower price by their own entrepreneurs. Wage arrears and other aspects are completely similar to what happened then but they are ignored. My guess is once one or a few countries default the ramifications on asset prices will be irreversible and there will be a resolution.

]]>