Oversight Panel: New Stress Tests Needed

The ""Congressional Oversight Panel"":http://cop.senate.gov, one of the federal watchdogs that oversees the government's $700 billion bailout of the financial industry, says regulators' stress tests of the nation's 19 largest banks should be administered again using more severe economic assumptions, and should be conducted over a longer period.
In particular, the panel's ""151-page report"":http://cop.senate.gov/documents/cop-060909-report.pdf pointed out that stress test examiners used an 8.9 percent unemployment rate in their worse-than-expected economic scenario. The Labor Department reported last week the jobless rate climbed to 9.4 percent in May, bringing the average unemployment rate for 2009 to 8.5 percent - and that figure is expected to keep rising. The Congressional Oversight Panel says if the monthly rate continues to increase and the yearly average exceeds regulators' 8.9 percent threshold, the stress tests will need to be repeated.
The panel said that stress testing should also be repeated ""so long as banks continue to hold large amounts of toxic assets on their books."" The FDIC announced earlier this month that it is postponing the auction sales of legacy loans under the administration's Public-Private Investment Program (PPIP) - a program that was designed to purge banks of the bad mortgages that have led to significant write-downs since the beginning of the financial crisis. The banks themselves have expressed reluctance to participate in PPIP, arguing they have a better chance of recovering the value that has slipped from these assets by holding them until the market and housing prices improve.
In addition, the Congressional Oversight Panel said, between formal examinations conducted by the government, banks should be required to run internal stress tests and share the results with regulators, with these regulators having the ability to use stress tests as they deem necessary in the future to promote a healthy banking system.
Despite their recommendations, the panel did say that ""on the whole,"" regulators used a ""solidly designed"" and ""reasonable"" test model, and praised the Federal Reserve for releasing unprecedented information on the banking system when it announced the test results. Still, panel members said regulators did not provide enough details about how the evaluations were conducted, saying the lack of transparency raised ""serious concerns"" and left ""unanswered questions.""
Regulators released the results of their simultaneous stress tests of the nation's largest banks last month, concluding that 10 of the 19 needed to raise a combined $75 billion in common equity to hold up under worsening economic conditions and continue lending. The capital buffers assessed were much lower than analysts and investors expected, which has helped to boost market confidence in the nation's financial system. Since the stress test results were announced, the banks involved have raised nearly $90 billion from private equity investors and the sale of stock.