Stressed

Depending on your age, health and a variety of other factors, your doctor might think it is a prudent move for you to have a stress test. The idea is to see how your body performs under heavy load conditions. They put you on a treadmill and slowly crank up the speed and incline, forcing you to work harder and harder. As your heart beats more and more, a doctor monitors your EKG to make sure all is working as expected. Harder than usual perhaps, but hopefully staying the course by pumping blood and not freaking out.

In theory this is no different to what they do for banks. Put in place on a widespread basis after the 2008 financial crisis, the idea of a financial stress test is to make sure that institutions could withstand a situation that was beyond day-to-day normal and not falter. As time has gone on, the tests have gotten more involved, and currently encompass pushing 28 variables outside of everyday ranges, including hits to the real estate and equity markets, declines in personal and corporate incomes, and rises in the unemployment rate and national debt. All those possibles and more are loaded into a simulator, along with a bank's assets and liabilities. Then they press "play" and see what happens. 

In the first case you see what controlled physical exertion can do to your ticker. In the second, it's what preset statistical outliers can do to your account. Seems to make sense. But there's a weak spot, and it was highlighted in the recent collapses of Silicon Valley, Signature and Republic, as well as the most recent troubles at Pac West and Western Alliance. It turns out that the real world is rarely that neat. Or more specifically, while the technical measures played a part, it was the human factors that caused the problems. 

That's because on a purely mathematical level, the numbers might work out. There might be enough deposits to cover withdrawals, there are cross-lending arrangements with other institutions, and there are federal programs to backstop unintended issues. But what the scenarios don't account for is emotion and wishful thinking and the ability of a depositor base with smartphones to move their money in an instant. 

Our always on, always connected society has made the real-world test to be as much about perception as reality. It's not that the underlying fundamentals are not important, it's just that factors having nothing to do with empirical measures can shoulder aside hard data. The result is that the speed with which a rumor, aspersion or whisper travels can negate the actual bottom line. While attributed to Mark Twain and others, it was first put succinctly by Jonathan Swift in 1710: "Falsehood flies, and the Truth comes limping after it."

That's not to say that there weren't issues in the aforementioned institutions. Given a few more news cycles orderly plans might have been able to be put into place to negate the meltdowns. But once it made it beyond an article in Banking Quarterly and into a Twitter feed, it was just matter of time before the flood gates broke and a flood of "Ready to transfer funds?" pop-ups popped up.

With that in mind it might be more realistic if the tests were broadened to encompass the kinds of factors that occur in today's environment. Sure, the GDP forecast might tick down, but how would your bank handle it if there was a Twitter post that it was backed by Russia?  Or that your credit union financed the local Proud Boys chapter? Or that every bill you pay electronically is secretly funneled through a Chinese hacker organization? Mind you, there might be absolutely no veracity to any of the claims, but what has that got to do with anything? 

Perhaps we should extend the concept of real-world factors beyond just finance to our own health. While you are on that treadmill, maybe your doctor could play a tape of your kids fighting. Or make your cell phone's "you've got mail" alert ping repeatedly, and not let you answer.  Or hand you a notice that your company was just acquired by Elon. If none of those make your heart swell and burst, you should be good for another couple of years. You can only hope your bank is in the same shape.

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Marc Wollin of Bedford tries to avoid stress, at least at home. His column appears regularly in The Record-Review, The Scarsdale Inquirer and online at http://www.glancingaskance.blogspot.com/, as well as via Facebook, LinkedIn and Twitter.