Fed policy on banks' stress tests clarified
The central bank vows to rescue any of the 19 institutions, even those whose results disclose vulnerability. The 19 were briefed on their scores.
WASHINGTON - The Federal Reserve said yesterday that the government was prepared to rescue any of the banks that were given a "stress test" and deemed to be vulnerable if the recession should worsen sharply.
The Fed, in outlining the test's methodology, said the 19 companies, which together hold one-half of the loans in the U.S. banking system, would not be allowed to fail - even if they fared poorly on the stress test.
"It appears 'too big to fail' is a fundamental philosophy - it's a philosophical principle," said Mark Williams, a finance professor at Boston University and a former bank examiner for the Fed.
Critics say that policy has put taxpayer money at risk on behalf of banks that have received billions in government bailouts and guarantees.
Separately yesterday, executives of the 19 banks were briefed on their test results in meetings across the country. By law, the banks cannot publicize the results without the government's permission, but Wall Street buzzed with anticipation, and most financial stocks rose.
The 19 companies tested include not only major traditional banks, such as Citigroup, but also large financial-service companies such as credit-card-issuer American Express Co. and insurer MetLife Inc. that last fall applied to the government to officially become banks so they would be eligible for funds from the $700 billion bailout program.
Yesterday's Fed announcement contained little new or concrete information. But Fed officials said in a conference call with reporters that banks would be required to keep an extra capital buffer - that is, an extra cash reserve - in case losses continued to mount.
The tests were designed to gauge how banks would fare both if the recession ran its course as forecast and also if the recession became much worse than most economists expected. But the Fed said a bank needing more capital to cushion against loan losses under its "adverse" economic scenario should not be considered insolvent.
Rather, such a bank - if it could not raise additional money from private investors - could get financing from the Treasury's bailout fund.
Even if the tests showed a bank needed more capital, that "is not a measure of the current solvency or viability of the firm," the Fed said in a description of the tests' methodology.
Battling the worst financial crisis since the 1930s, the government has committed more than $11 trillion in loans, investments, and other measures to prop up troubled institutions and to stabilize the banking system.
For months, officials have put off questions about the banking system by saying they were awaiting the stress-test results.
The delays have led investors to fret: If the test shows every bank to be strong, that would look like a whitewash and would not be taken seriously. Yet, once investors could distinguish stronger from weaker banks, they could start selling off weaker banks that remained stable but that might falter if the recession got much worse.
The banks will have a few days to review the government's stress-test results and appeal any findings they disagree with.
Regulators are expected to give them the final results Friday.
The Financial Test
A guide to the test that federal regulators are imposing on big banks.
Two test scenarios:
1. Based on current recession forecasts.
2. Assumes the recession worsens.
The test goals:
1. Determining the quality of a bank's loans.
2. Determining whether a bank has enough money on reserve to withstand losses on loans that default.
The next step:
Banks with insufficient reserves will be forced to seek more private or government money.
Possible result:
The government could acquire a big stake in more banks.
SOURCE: Inquirer research and wire services
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Under Stress
These are the 19 companies undergoing the federal stress test.
Company Headquarters
American Express New York
Bank of America Charlotte, N,C.
Bank of New York Mellon New York
BB&T Winston-Salem. N.C.
Capital One McLean, Va.
Citigroup New York
Fifth Third Bancorp Cincinnati
GMAC Detroit
Goldman Sachs New York
JPMorgan Chase New York
KeyCorp Cleveland
MetLife New York
Morgan Stanley New York
PNC Pittsburgh
Regions Financial Birmingham, Ala.
State Street Boston
SunTrust Atlanta
US Bancorp Minneapolis
Wells Fargo San Francisco
SOURCE: Inquirer wire servicesEndText