Officials Prepare to Analyze Stress Tests

Top federal bank regulators plan to meet early this week to discuss how to analyze the results of stress tests being conducted on the country's 19 largest banks, people familiar with the matter said. Regulators announced the tests two months ago as part of an effort to determine how much assistance big banks might need to continue lending if the economic downturn worsens.

The government is wrestling with how to bolster the lenders without appearing to prop up banks that are beyond repair. Meanwhile, Treasury Secretary Timothy Geithner said Sunday that the Obama administration would consider removing top management and boards at financial companies if the government were to offer "exceptional" assistance to keep the firms operating.

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"When in the future -- or I would say if in the future -- banks need exceptional assistance in order to get through this, then we'll make sure that assistance comes with conditions, not just to protect the taxpayer, but to make sure this is the kind of restructuring necessary for them to emerge stronger," Mr. Geithner said on CBS's "Face the Nation."

"Where that requires a change of management and the board, we will do that." At this week's meetings on the stress tests, regulators also are expected to discuss how new changes to accounting rules might affect each bank's performance in the tests. The Federal Accounting Standards Board voted last week to make it easier for banks in some cases to limit losses on assets they don't intend to sell.

Some government officials think this could significantly improve some banks' condition on paper. The announcement of the tests in February drove down bank stocks, as investors fretted that the government might use the tests to shut down or nationalize lenders. The Obama administration has said it won't let any of the banks undergoing the tests to fail. The Federal Reserve is overseeing the stress-test-analysis process.

People familiar with the matter said the final analysis isn't likely to be completed until at least the end of the month. Eugene Ludwig, chief executive of Promontory Financial Group, which advises financial firms, said the approach regulators take in analyzing the data and specifically, in comparing the data of different banks, "is a very big deal, because all loan portfolios, even with the same surface characteristics, don't perform the same at all."

"I think serious efforts will be made to respect the confidential nature of the test and its results," he said, but added that "there is a real danger that the results of the stress test are uncovered and this roils the markets."

Regulators designed the stress tests to ensure that banks could survive -- and continue lending -- even if the unemployment rate were to rise above 10% and home prices to fall by an additional 25%. The tests, which were conducted largely by economists and experts using mathematical models, seek to determine whether a bank would need more capital to continue lending under such circumstances.

The government could direct banks to raise more capital if the economy worsens to ensure that they continue lending. If the banks can't do that, the Obama administration has said it would provide them with public funds.

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Posted: 4/6/2009 7:21:09 AM by Global Administrator | with 0 comments

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Officials Prepare to Analyze Stress Tests

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