STRESS TESTS- an argument on their reliability

A stress test, when used in financial institutions, is a measure of a firm’s/ portfolio’s ability to deal with an economical crisis. The test is based on a series of hypothetical ‘what if-‘ questions that would asses a firm’s condition during any rough patch. It was pressured upon after the 2008-09 financial crisis.

How does it work?

Let’s say, I have a car manufacturing company. Now taking the example of any economic emergency, what if the consumer demand falls by x% more? How will the firm deal with it? Does the firm have enough cash and reserves to survive in the midst of the rising liabilities?

Today,this analysis factor is known across the globe for its’ accuracy and efficiency.

Admist the coronavirus pandemic,the reserve bank of India analyzed a string of these stress tests to project the possible impact on bank balance sheets in the current economic scenario.

But the question is, are these stress tests really reliable when it comes to fulfilling their purpose?

The answer might be No.

How can I put my point?
Let me explain-

1)Unforeseeable situations can arise,( the covid pandemic being the biggest example of it,) which remain out of the bank’s control.

2) As the firm nears the time of these stress tests, it can easily have reserve stockpiles or cash in hand between that period of time to whitewash their image.

3)The stress tests emphasize too much on a singular scenario, like the covid pandemic, what if it happens again? Well, ofcourse any firm would be ready after 2020 to deal with a pandemic with reserves, but what about a situation when there’s more than just one of them?
There really is no guarantee or a foolproof way for them to envisage the future.

4) Anat admati, an economist and a professor at Stanford argues about how it’s not a clean chit of a bank’s financial health. When the banks say that their finance is pretty managed to market themselves, well, they wood say that, wouldn’t they?

To conclude, i would say stress testing is absolutely not wrong. But when the banks have to publish their results to the public, they might go one step forward, have the liberty to market it. Market the test that might be a hoax. To a public domain.

Is it really ethical?