Harvard Professor Hal Scott Questions Usefulness Of 'Stress Testing' Banks

Hal Scott, Harvard professor, told Yahoo! Finance (Yahoo! Inc. (NASDAQ: YHOO) the much ballyhooed bank stress tests will effectively do nothing to avert another financial crisis.

One objective of the tests is to push banks to increase capital reserves, which now stand at about 15 percent of equity for the largest banks. Unfortunately, Scott said in a financial crisis, that is not nearly enough.

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Scott also noted that, unlike in 2008, the Federal Reserve is basically out of moves to coax the economy in the case of a meltdown. In other words, money supply management won’t save us next time. The professor also stated contagious runs on banks are a bigger threat than banks being “too big to fail,” a phrase and a concept that received a great deal of attention following the economic unrest of 2008.