Tuesday, June 24, 2014

Stress Tests in a graphic

One of the differences between the way the US and European authorities responded to the financial crisis was in the rigor of their respective stress tests. The American stress tests credibly signaled the health of financial institutions and thereby stemmed the spread of the panic, whereas that in Europe did little to allay market suspicions and fears.

This graphic nicely captures how these tests restored normalcy to the credit markets.
Once the test results were announced, the TED spread (indicates the perceived risks in lending to banks), CP spread (a similar indicator for business), and the Baa spread (indicating perceptions of corporate risk) all fell precipitously. 

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