Bank Stress Test Results Delayed
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WASHINGTON — The Federal Reserve will release results Thursday of "stress tests" for the 19 large banks at the center of the nation's financial crisis. The results will shed light on which banks may need government support to withstand a more severe recession.
The Fed will detail the health of individual banks and provide an overall snapshot, according to a government official who spoke on condition of anonymity because of the sensitive nature of the matter. The information will be released Thursday afternoon, the official said.
Negotiations between banks and regulators about the test results pushed back the release date, which was expected to be earlier in the week.
The Fed will reveal the extra capital the banks will need to absorb possible future losses on investments and loans _ such as for commercial real estate and credit cards _ if the recession were to worsen.
Last week, Fed officials said all 19 banks that underwent stress tests will need to keep an extra buffer of capital reserves beyond what's now required, in case losses on these loans and other assets continue to mount. That means some banks will have to raise more cash.
Banks will have up to six months to raise money from private companies, Federal Reserve Chairman Ben Bernanke has said. If they can't, the government would provide aid.
One option for boosting capital would be to let the government increase its stakes in banks. That would be done by converting the government's stock in banks from preferred to common shares. It wouldn't require any further taxpayer money, though it would hurt existing shareholders and put taxpayer money at greater risk.
Another option would be for the government to inject more capital into a bank, using taxpayer money from the $700 billion financial bailout program. Treasury already has committed more than $580 billion of the money for programs aimed at strengthening banks, winding down a failed insurer, sustaining the auto industry, helping homeowners avoid foreclosure and spurring lending to small businesses and consumers.
The stress tests were done to help regulators decide whether the banks have sufficient capital _ and the right mix of it _ to withstand additional shocks to the economy over the next two years.
Regulators are trying to make information public without roiling financial markets. If they provide too much detail, banks singled out as needing more capital could be punished by investors. Too little detail could undermine the process' credibility, damaging efforts to shore up banks.
In the tests, the Fed put banks _ including Citigroup, Bank of America and Goldman Sachs _ through two hypothetical scenarios. The idea was to see how much of a financial hit banks would take on their loans and other assets.
One scenario looks at how banks would fare over the next two years based on how the economy was doing in February.
The second, more important scenario assumes the economy will sink into a deeper recession than analysts expect. It assumes that the overall economy, as gauged by the gross domestic product, will fall 3.3 percent this year and unemployment will reach 10.3 percent in 2010.
In that worsened scenario, consumers and businesses would have more trouble paying back the money banks have lent them for home mortgages, credit cards and commercial real estate. These loans and other assets would become less valuable. Regulators are forcing banks to set aside money to make sure they can survive those losses.
The exact format of the stress-test results will be revealed to bank executives in briefings with regulators Tuesday, said two industry sources who spoke on condition of anonymity because they were not permitted to discuss the matter.
Initial test results indicated that Citigroup and Bank of America would need to raise more capital, sources told The Associated Press earlier this week. The banks have been negotiating with regulators over the initial findings.
The two banks already have received capital injections from the government's $700 billion bailout fund. They also have been given government guarantees on billions of dollars worth of loans.
Investors, meanwhile, have grown more concerned about regional banks with lots of risky loans on their books. If the recession were to worsen, defaults on those loans could soar. Banks that carry such loans, including KeyCorp and Fifth Third Financial, will likely be asked to boost their capital reserves, according to analysts.
Regional banks look riskier than some Wall Street firms, because they carry so many vulnerable loans for mortgages, credit cards and commercial real estate.
By contrast, investment banks like Goldman Sachs have larger portfolios of securities that already have lost much value. So the stress tests treated these securities as more durable than they did loans.
Fixing the banking system and restoring credit to people and businesses is necessary to lift the country out of the recession that's dragged on since December 2007.
Damage from the housing, credit and banking crises _ the worst since the 1930s _ has badly pounded banks. A growing number have failed. Others have suffered huge losses.
Last week, the International Monetary Fund estimated that total losses on loans and securities originating in the United States at $2.7 trillion from 2007 to 2010. It also estimated that $275 billion more in capital would be needed to cushion against further losses.
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JEANNINE AVERSA and DANIEL WAGNER 05/ 1/09 05:43 PM ET Associated Press