Banks get stress test results next week, public on May 4

McClatchy NewspapersApril 16, 2009 

WASHINGTON — Federal regulators will begin telling the nation's 19 largest banks late next week and the public 10 days later the results of "stress tests" designed to gauge whether the big financial institutions could survive a much deeper economic downturn, McClatchy has learned.

A senior regulatory official, speaking on condition of anonymity because details about the stress tests haven't been finalized, said that banks will be able to respond to the conclusions reached by federal regulators from April 24 and May 3. Then the results will be given to the public on May 4.

"What comes from regulators and what comes from banks is a matter (still) under discussion," said the senior official.

Regulators are likely to release late next week, on a number of government Web sites, the assumptions they've used in conducting the stress tests, which examine what would happen to bank capital in different economic circumstances.

Although regulators frequently examine the banks, the current tests launched by Treasury Secretary Timothy Geithner are designed to evaluate what would happen to bank balance sheets in gloomy scenarios where the unemployment rate reached 10.3 percent.

That's not the worst case possible to many mainstream economists, who think 10.3 percent unemployment, or higher, might be probable before the U.S. economy finally recovers from the worst economic downturn since the Great Depression.

If regulators determine that a bank lacks sufficient capital, it'll get six months to seek private capital or face the government injecting its own capital into the bank and taking an ownership stake. Banks needing more capital can skip the search for private capital and appeal directly to Treasury for funds — and federal partnership.

The stress tests are controversial, partly because Treasury didn't reveal just what regulators are looking at and where the money will come from if future capital injections are needed.

This led to the view that the stress tests were a tool to force banks into putting up for sale the so-called "toxic assets" clogging their balance sheets. Treasury recently announced a parallel bank-rescue program in which the government would provide money to subsidize private investors who'll purchase the assets, which currently have few buyers.

"I think what we now know is they didn't have a consistent plan for the stress tests. They probably initially wanted to use it as a private source of leverage with the banks and a public source of approval for banking," said Vincent Reinhart, a senior fellow at the American Enterprise Institute, a conservative policy research center.

The problem, he said, is that banks wouldn't be allowed to differentiate themselves under the original plan. Some big banks such as Goldman Sachs & Co. already have announced that they're healthy and want to return their government bailout money. That puts pressure on other banks to do the same.

"By subtraction, you can figure out who the bad ones are," said Reinhart, a former chief economist of the Federal Reserve's rate-setting Open Market Committee.

Banks perceived to be weak could see a flight of both investors and depositors. That's why making results public is tricky for bank regulators, who include the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

Following the March 2008 failure of investment bank Bear Stearns, investors immediately began fleeing the bank perceived to be the next weakest, Lehman Brothers. It eventually failed in September, a turbulent month in which other institutions perceived to be weak — such as Wachovia and Seattle-based thrift Washington Mutual — were merged into other institutions.

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