Federal regulators met this week to decide how to interpret and apply the results of the government’s bank stress tests, but said they will delay the release of their analysis until after the banks' first-quarter earnings are issued so as not to confuse market reaction.
As part of its overall Financial Stability Plan announced in February, the government is testing how the nation's 19 largest banks would perform under adverse economic conditions - in particular, under the dire, though not anticipated, scenario of the unemployment rate rising above 10 percent and home prices falling another 25 percent. The screenings are an attempt to assess the institutions' ability to maintain operations and continue lending under such circumstances. At the conclusion of the tests, any bank that is determined to be under-capitalized will have six months to either raise private funding to compensate, or accept a government buy-in.
Treasury Secretary Timothy Geithner has said that the government may begin ousting top management and board members of financial institutions that require further taxpayer dollars. In an interview with _CBS'_ ""Face the Nation [1]"" over the weekend, Geithner said, ""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.""
The stress tests are due to be completed by the end of April, but Treasury officials have indicated that they will likely be finished before then. According to a Reuters [2] report, many of the top banks have already turned in their internal versions of the test to regulators. Bank of America Chief Executive Kenneth Lewis told Reuters last week that his bank has already completed its test. Bank regulators are now at the stage of reconciling their own analysis with the banks' internal assessments.
Two factors that may complicate the results are the government's recently announced Public-Private Investment Program (PPIP) and the adjustments made to mark-to-market [3] accounting rules approved by the Financial Accounting Standards Board (FASB) last week - both of which are aimed at bolstering banks' balance sheets when it comes to distressed mortgage assets.