Gov't official: bank test results to come Thursday

May 1, 2009 12:00:00 AM PDT
The Federal Reserve will release "stress tests" results for the nation's biggest banks on Thursday, according to a government official. Deliberations between banks and regulators about the tests' results pushed back the release date, which initially was expected to be earlier in the week.

In addition to an overall snapshot of the health of the 19 large banks being assessed, the Fed will provide detail about individual banks, according to the official, who spoke on condition of anonymity because of the sensitive nature of the matter.

The Fed will describe the resources banks would need to absorb losses on certain types of loans and investments under adverse economic conditions.

Last week, Fed officials said that 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 continue to mount. That would mean some banks will likely have to raise additional cash.

If they do, banks will have up to six months to raise the money from private companies, Federal Reserve Chairman Ben Bernanke has said. If they can't, then the government would provide assistance.

One option for help: allow the government to sharply 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 additional taxpayer money, although it would increase their risks.

Another option: having the government make a fresh capital infusion in a bank using taxpayer money from the $700 billion financial bailout pot.

The tests were conducted to help regulators decide whether the banks have sufficient capital -- and the right mix of it -- to withstand any additional shocks to the economy over the next two years.

In the tests, the Fed put banks -- including Citigroup, Bank of America and Goldman Sachs -- through two hypothetical scenarios for what might happen to the economy.

One scenario reflects forecasters' current expectations about the recession. It assumes unemployment will reach 8.8 percent in 2010 and house prices will decline by 14 percent this year. The second imagines a worse-than-expected downturn: Unemployment would hit 10.3 percent and house prices would drop 22 percent.

Repairing the nation's banking system and getting credit flowing more freely to people and businesses is a necessary ingredient for trying to lift the country out of a recession that has dragged on since December 2007.

Fallout from the housing, credit and banking crisess -- the worst since the 1930s -- has badly pounded banks. A growing number have failed and 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.

(Copyright 2009 by The Associated Press. All Rights Reserved.)

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