Ricardo Caballero, 20 April 2009

The approaching release of stress-test results is accompanied by widespread fears that the tests are not rigorous enough. This column argues that a modification to the Capital Assistance Programme would neutralise these concerns. Banks should hold the capital implied by the central scenario, and buy government insurance to cover more extreme outcomes, thus taking the aggregate risk off the leveraged institutions and breaking the link between bad economic news and the financial sector’s health.

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