Book Description

Spurred by the success of the first stress test of US banks toward the end of the global economic crisis in 2009, stress testing of large financial institutions has become the cornerstone of banking supervision worldwide. The aim of the tests is to determine which banks are adequately capitalized under severe economic shocks and to order corrective measures for those that are vulnerable. In Banking’s Final Exam, one of the world's leading experts on banking regulation concludes that the tests administered on both sides of the Atlantic suffer from fundamental weaknesses, leading to a false sense of reassurance about the safety and soundness of the banking system. Some weaknesses can be corrected within the existing bank-capital regime, but others will require bold reforms—including higher minimum capital requirements for the largest and most systemically-important banks. The banking industry is likely to resist these reforms, but this book explains why their objections do not hold water.

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Editorial Reviews

This is an extremely useful book: thorough and balanced. The reader will learn a lot from Morris Goldstein’s insightful and candid review of a large body of theoretical and empirical work and from the lessons he draws about US and EU-wide stress tests. An impressive piece of analysis.

—Ben Bernanke, Distinguished Fellow at the Brookings Institution and former Chairman of the Board of Governors of the Federal Reserve System

The best work available on stress tests, capital adequacy, and the leverage ratio. A truly excellent book.

—Charles Goodhart, Emeritus Professor at the London School of Economics and former Member of the Bank of England’s Monetary Policy Committee

A comprehensive treatment—full of valuable real-world illustrations and with plenty of food for thought on how to improve stress testing, capital adequacy, and regulation. A stimulating read.

—Stefan Ingves, Governor of Sweden’s Riksbank and Chair of the Basel Committee on Banking Supervision

In this important book, Morris Goldstein challenges the false reassurances of ‘reformed’ yet inadequate regulations that maintain a dangerous banking system. Delving into the devilish details, he offers a better path.

—Anat Admati, George G. C. Parker Professor of Finance and Economics, Stanford Graduate School of Business, and coauthor of The Bankers’ New Clothes

Takes bank stress tests from the impenetrable to the understandable. Morris Goldstein’s reform proposals—presented with clarity and based on a keen appreciation of the facts—will stir up a hornet’s nest among apoplectic bankers but will be welcome for those concerned about our next financial crisis.

—Orley Ashenfelter, Joseph Douglas Green 1895 Professor of Economics at Princeton University and former President of the American Economic Association

A powerful plea to end the make-believe in dealing with risk in banking.

—Martin Hellwig, Director, Max Planck Institute for Research on Collective Goods, and coauthor of The Bankers’ New Clothes

As we navigate the new regulatory regime of stress-tested bank capital, we are lucky to have Morris Goldstein to guide our way. Bankers, regulators and legislators ignore this timely and impressive volume at their peril.

—Peter Fisher, Senior Fellow, Tuck School of Business at Dartmouth, and former Undersecretary for Domestic Finance at the US Treasury

Brilliantly distills the essence from a wide range of empirical studies to show what still needs to be done to make major international banks more resilient. A magisterial book.

—Philip Turner, University of Basel and former Deputy Head of the Monetary and Economics Department at the Bank for International Settlements

Marshaling ample data and astute analysis, Morris Goldstein demolishes the repeated claim of Wall Street bankers that much higher minimum capital requirements for our largest banks would do grave harm to the US economy. Anyone serious about how to prevent future financial crises and taxpayer bailouts has to read this indispensable book.

—Dennis Kelleher, President, Better Markets

Data Disclosure

The data underlying this analysis are available here [zip].





Introduction: Scene Setting, Preliminaries, Outline, and Main Findings

1 Why Were the EU-Wide Stress Tests Not Better Received?

2 Operational Features and Evolution of the US and EU-Wide Tests

3 Criticisms of Stress Testing Methodology and the Measurement of Bank Capital

4 What We Have Learned—or Should Have Learned—about the Right Level of Bank-Capital Ratios

5 Estimating Capital Surcharges for Global Systemically Important Banks

6 Lessons from the US and EU-Wide Tests

7 A Plan for Bank-Capital Reform

8 Potential Objections to the Plan for Bank-Capital Reform and Closing Remarks

9 Postscript



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