Who is afraid of a banking stress test?

The government reveals its plan to determine how sick the big banks are. Don't hold your breath waiting for the results.


Andrew Leonard
February 26, 2009 2:09AM (UTC)

As promised, federal officials revealed more details on Wednesday of how regulators intend to conduct "stress tests" to determine the financial health of the nation's biggest banks. But anyone expecting "bold" or "swift" action, to borrow a couple of words that we've been hearing a lot about from President Obama lately, is likely to be disappointed.

The stress tests, which officially begin now, are to be finished no later than the end of April. They will evaluate the financial position of banks against two scenarios, a baseline scenario consistent with consensus economic projections by a handful of forecasters, and a "more adverse scenario" that sees unemployment rising above 10 percent in 2010, and home prices falling another 22 percent in 2009.

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If a bank is deemed under-capitalized it will then have six months in which to raise private capital before it must receive government aid. That aid will come in the form of convertible preferred secretaries which can be converted into common stock as needed.

But for now: The party line from the government to Wall Street is that there is no need to panic, and no requirement for nationalization:

Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized.


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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