Since I have done stress testing on 2 insurance companies, I could give you many details on the absurdities in the calculations and results, but rather I will give you the philosophical reasons. Neither side really wants to know the truth.

It's like going to a lawyer after the marriage has headed south, not to get a divorce, but so the financial aspects of the marriage are closer to bring the couple closer together rather than a marriage counselor so both sides can admit mistakes and learn to change the dysfunctions in the relationship.

First the government(s), wants to be the savior, not the bad guys in the stress scenarios. Yet if the big banks are to fail the government(s) policies were most likely the cause of the crash. To come the "rescue" of the banks they have to be able to do it without admitting error. They assume that "normal" channels are what will be available.

Further, admitting bias and ignorance of government is not part of the scenarios, yet in the last 60 years we saw a 30 year march to double digit inflation then a 30 year march to negative interest rates. In between a Savings and Loan scandal and a government push to free money for subprime fiasco. Pretending that government is by default "not guilty" and therefore the banks collapse won't result in a literal regime change so they won't be another bail-out is the unicorn assumption.

Second not just the To Big to Fails but all the financials want to assume that their advantage comes from their size an smart maneuvering, not from their government connections. That the markets and their customers/clients may react but won't revolt against them.

The test assume that the leadership acts in the best interest of the clients rather than doubling down and pushing for more and closer government favoritism in times of stress. They may test stress lapse rates but they don't ask if those rates can continue to accelerate or even if those lapse rates changes are in line with "normal" competitive pressure. Since the truth would hurt too much each side pretends they don't know the other is lying.


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