Banks Get 'Stress Test' Reports

Financial Exam Results To Be Released May 4

April 25, 2009|By Jim Puzzanghera and Michael Oneal | Jim Puzzanghera and Michael Oneal,Tribune Newspapers

For the past two months, more than 150 government auditors have fanned out across the country, examining the nation's 19 largest banks with a single, crucial goal in mind: figuring out how well they could withstand future storms and what help they might need to avoid a crippling meltdown.

As the so-called stress tests went on, the economy showed glimmers of settling down. Several major banks reported sizable profits instead of more losses. The stock market steadied. Signs of improved credit flow emerged.

But the availability of credit - the economy's lifeblood - remains far below normal. And some analysts warn that new shocks lie ahead in such areas as automobiles, commercial real estate, and securities based on credit card debt.

As a result, the stress test results may offer valuable indications of how well major banks could withstand new jolts, as well as whether they are holding down lending out of an abundance of caution or because past losses have left them too weak.

While the government has not identified which banks might need to raise capital, most economists and banking experts believe there will be some. Frederick Cannon, an analyst with Keefe Bruyette & Woods, has done his own stress tests using criteria similar to the government's, and he expects several of the 19 will require infusions, including a number of the regional banks.

For individual banks, the results could have serious consequences. If they are required to raise more capital, including more federal bailout money, that could undermine confidence in them and weaken the banks in the marketplace even if they remain solvent.

On Friday, federal officials privately began telling executives from the 19 banks the preliminary results of the examinations. The results will not be made public until the week of May 4. Banks are not allowed to disclose them ahead of time.

U.S. Treasury Secretary Timothy F. Geithner and Fed officials have said repeatedly that most banks are well-capitalized. But some economists say the tests were not stringent enough. The measure Treasury used might not reveal possibly serious vulnerabilities if the economy plummets, these economists say.

The Federal Reserve said Friday that the need for additional capital by a bank "is not a measure of the current solvency or viability of the firm." And the adverse scenario was not designed to be the worst possible case, just one that is "severe, but plausible." Banks judged to need more capital would have six months to raise it privately before the federal government stepped in with additional bailout money. The federal funds would be supplied in order to assure that a major bank did not fail and inflict more damage on the overall economy.

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