Will delaying the stress test results put further stress on the market?
One reason for the delay is that regulators and bank execs are a bit concerned about how the announcement will impact weaker institutions. Could it lead to the collapse of these smaller banks? A senior vice president at the American Bankers' Association in Washington told Bloomberg, "Everybody understands they've got a tiger by the tail here . . . If they don't let him go gently, there will be a lot of mauling going on." Regulators are concerned that the results could harm the lower-priced stocks, which could eventually lead another push lower for the markets overall.
There has been a great deal of speculation about the results of the stress tests and the health of the banking system -- what will this announcement mean? These tests are supposed to determine the health (or lack thereof) of the banking industry and the delay gives the perception that the report may be a bit too much for the banks to handle. This may not be the case, but you have to remember that perception is a large part of reality.
Moreover, the preliminary results were given to the banks last week -- so why can't we know the results? Earlier this week it was reported that Bank of America (BAC) and Citigroup (C) were told that they may need to raise more capital, and the market withstood that revelation. How bad can the news really be if the Fed thinks we need to delay the findings for the market's sake? It is going to be very difficult to keep these results from impacting the market, and I'm not sure that delaying the results is the best way to handle the announcement.
How would I handle the release? Just like the Fed originally planned, announce the results on May 4, just make sure to allow plenty of time for investors to digest the news so there isn't a spate of panic selling. If the news is bad, time will allow the market to see exactly how bad the news really is. If the news is good, then open the stable doors and don a red sash around your waist, because the bulls are going to run.
I have one last question about the delay. Haven't the regulators had plenty of time to think about how they will announce the results? Seriously, I would think the best way to release the results of the test would have been determined well before yesterday. Am I asking too much for the Fed to have an announcement plan in place ahead of time?
Again, perception is a good part of reality -- and today's announcement could rankle the markets a bit, maybe even more than the stress test's real results.