STRESS TEST

‘Dad, I want to ask you about the stress test’ quipped my son one summer morning not too long ago. I began to sweat in addition to the seasonal heat and quickly looked around if my wife was listening. I had skipped my annual physical for the past two years and though there were others elder to me in the house somehow, I was made the butt of their reminders for annual physical while the others never ever did any. Realising we were alone I shushed him into silence, ‘Now don’t you start about my annual physical.’ He shook his head saying, ‘Not yours, I am referring to the US Banks which has scared the markets into the negative territory all over the world.’

Explaining the world economics when it is contemporary is daunting for the sole reason that the person explaining needs to understand it first. Bidding for time to think, I began as if it was an answer I had learnt during my school days. ‘Stress test for Banks is just like for humans.’ As I searched in my cerebellum or cerebrum for the next sentence, my son’s face lit up like that of an inventor at the point of success and blurted, ‘A Bank is a Company and a Company is an artificial person; so is this phrase of stress test personification or is it a transferred epitaph?’ He began with logical clarity but ended up in a question to throw me into confusion. How he connected English grammar beat the hell out of me. ‘Huh?’ is all I could muster. He explained, ‘I understand that that legally a Bank is an artificial person but who will do the stress test on the machine? As the Bank is inanimate, will the Directors have to run on the machine? If so, then that is the transferred epitaph’. I mused loudly, ‘Most of the Directors being at the age that they are, will not only fail the stress test but may experience cardiac arrest during the test.’

‘You mean all the Banks will fail the stress test?’ asked my genuinely worried son. ‘No son’, I pacified him, ‘this stress relates to the principle of how the Bank will survive the current health of their portfolio for which a white paper was already released.’ ‘How will they measure that?’ was his expected query. ‘A bit of balance sheet analysis’ I replied secretly hoping he would not ask for details. He thought for a moment and quipped, ‘It should be called it the BIKINI round instead.’ ‘What has a bikini got to do with Banks?’ I got almost annoyed at the track of his mind. ‘When we learnt accountancy, I read somewhere that a Balance Sheet is like a bikini – quite revealing but hides the vital parts.’ Stunned at the ironical reality of this statement I decided it was time to introduce him to the finer aspects of stress test to the level of his satisfaction.

‘The Government wants to find out how much of the loss the Bank can bear in case the probable losses become a reality’ I summarized in simplistic form. ‘Do you mean like the PBT?’ he asked. I was pleased that he remembered accounting acronyms. ‘Yes, the test is to find out whether the profit before tax is sufficient to absorb the loss.’ Son shook his head saying ‘By PBT what I meant was Pressure Bursting Point which we saw at the pipe factory you had inspected where a piece of pipe was put under measured pressure and they recorded at which pressure it broke.’ Now I shook my head saying, ’Those are tolerance tests which cannot be applied to Banks as there is nothing physical to measure.’ He was still confused as he commented, ‘You mean that to a non-manufacturing industry instead of a PBT we have Stress Test?’ Before I could reply, his face again lit up as he said, ‘Now I get it, STRESS is the acronym for the finance companies. I can warrant it stands for SIMULATED TEST RESPONSE to EVALUATE SINK SYNDROME.’ Surprisingly I understood his interpretation that the Banks are victims of epidemic during economic downturn and the illness that affects them is the sink syndrome by which the Bank sinks into losses and later, into oblivion.

‘Never heard of such a test in India’ commented my son. ‘We don’t need to son,’ I pacified him, we have the great supervising authority who releases circulars from time to time to guide the Banks onto the healthy path.’ ‘Anxiousness of the contents of the next circular must be giving the Bankers a lot of stress’ my son echoed the thoughts of a minority of Bankers who dreaded the circulars at the fag end of the financial year from the supervising authority. ‘No.’ I retorted, ‘I was referring to the prudential norms and capitalization issues which were taken care of by India 3 years before this crisis.. ‘Wow’ my son appreciated, ‘we are ahead of the west?’ ‘After all, the sun rises in the east’, I boasted.