The stress tests don't provide comfort regarding the health of the banks. As Nouriel Roubini, Chairperson of RGE Monitor, has pointed out, the macro-economic environment is likely to be significantly worse than the adverse scenarios used. The Federal Reserve hinted that banks -- even banks that passed the "stress test" -- would be required to hold extra capital. This is puzzling, as surely a bank is appropriately capitalized - or it isn't. Given that the test is the basis for setting solvency capital requirements, this is hardly reassuring or a guarantee that further taxpayer-funded recapitalization of the banking system isn't going to be needed.

Rumors that the banks would meet their stress test were quickly followed by new suggestions that Citigroup (C) and Bank of America were in discussions about raising capital. It's difficult on this basis to draw any conclusion as to whether the banks are appropriately capitalized.

The proposal floated by some banks -- to return taxpayer capital -- misses an essential point. The banks didn't offer to waive the government/FDIC guarantees, which have allowed them to raise funds in the capital markets. The suspicion is that the proposal had more to do with avoiding close public scrutiny of compensation and hiring practices. Goldman’s compensation costs increased 18% in the first quarter while employee numbers were down around 7% - translating into a 27% increase in employee costs.

The reality is that the global economic system is deleveraging, and levels of debt must be reduced. As result, asset values are declining and sustainable growth levels have fallen significantly. In this environment, banks are likely to continue to suffer losses on assets (bad debts and further write-offs) and earnings will remain sluggish (lower loan demand and lower levels of financial transactions). Higher funding costs and the need to raise capital compound the difficulties. For the banks currently: "On the liability side, some things aren’t right and on the asset side, nothing’s left."

Many major global bank shares are still, on average, trading at levels 70-90% below their highs. Following the collapse of the "bubble" economy, Japanese banks staged a number of significant recoveries in share price before falling sharply, necessitating government intervention to recapitalize and consolidate the banking system.

There seems to be a patent unwillingness to admit to and confront the problems facing the industry. Recognition of the problem is generally a prerequisite to working towards a solution.

Amusingly, Peter Hahn, a former managing director of Citigroup and now a fellow at London’s Cass Business School, was reported by Bloomberg as saying: "When you look at the income numbers that have been put out by banks recently they contain so much fudge and financial manipulation. You could say that the automobile industry has a clearer future at the moment."

Jim Cramer in one of his "raves" on TV referred to bank accounts as "fiction." He referred to them as the work of Somerset Maugham, William Faulkner or Joseph Conrad. In reality, they're the works of lesser writers - pulp fiction or romantic potboilers.

Banks have gone from catastrophic to just awful.

By most standards, that doesn't constitute a necessary and sufficient condition for a recovery in the global economy.