Obama to Meet With Economic Team Tomorrow on Bank Stress Tests
By Robert Schmidt and Roger Runningen
bloomberg.com
April 9 (Bloomberg) -- President Barack Obama will get a progress report on stress tests at the 19 biggest U.S. banks when he meets tomorrow with his economic team.
Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben S. Bernanke and Sheila Bair, chairman of the Federal Deposit Insurance Corp., will attend the session. The group also will have a “significant discussion about other aspects of the economy,” said Josh Earnest, a White House spokesman.
The exams, to conclude by the end of April, are designed to show how much extra capital banks may need to survive a deeper economic downturn. While the tests are a central element of the administration’s financial-industry rescue, both banks and regulators are wrestling with concerns over how the results will be revealed and what significance investors will put on them.
“There will be much confusion as everyone tries to decide what it all means,” said Wayne Abernathy, executive vice president at the American Bankers Association in Washington. “Our worry has been that the stress tests become a new source of stress -- real-life stress.”
One concern is that a bank’s report card could leak out during earnings conference calls, which begin later this month. That could push stock prices lower for banks that are perceived to be weak.
Just how the tests, which are still under way, are revealed also remains under debate. Officials don’t want to put undue pressure on banks that need capital, while they also aren’t inclined to keep information from the markets.
Providing ‘Clarity’
“Fixing the system means indeed, providing clarity to investors about insolvent institutions and taking those institutions out of the mix,” said Joseph Mason, a Louisiana State University professor in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency.
Treasury spokesman Andrew Williams said yesterday that the department is still targeting the end of April to finish the stress tests and announce some type of findings.
Bank regulators, who are working together to evaluate the exams, say the process will help spur recovery and lending.
The exams are “a necessary step in the process of proactively assuring the strength and stability of our banking system over the next few years,” said Andrew Gray, a spokesman for the FDIC’s Bair. “These assessments should guide institutions in whether they should raise capital or sell assets to promote a more vibrant, strong banking system.”
Private Capital
In February, the Treasury said banks would have six months after the reviews to raise any new capital they might need. If the money isn’t obtained from private investors, the government will provide the funds from the $700 billion bank rescue plan.
In their assessments, regulators will incorporate off- balance-sheet commitments, earnings projections, risks of the banks’ business activities and the composition and quality of their capital, according to the Treasury.
The reviews are based on two scenarios for the economy. The “baseline” forecast projected a 2 percent economic contraction and an 8.4 percent jobless rate in 2009, followed by 2.1 percent growth and 8.8 percent unemployment in 2010.
The “alternative more adverse” scenario had a 3.3 percent contraction in 2009, accompanied by 8.9 percent unemployment, followed by 0.5 percent growth and 10.3 percent jobless in 2010.
The Fed has taken the primary role in determining how much additional capital the banks need, people familiar with the matter have said.
Holding Companies
All 19 of the firms under scrutiny, from American Express Co. and GMAC LLC to SunTrust Banks Inc. and Citigroup Inc., are bank holding companies, giving the Fed an over-arching role.
The tests are designed to mesh with the administration’s effort to remove distressed mortgage assets from banks’ balance sheets, which have hampered lending to consumers and businesses. Officials aim to have the first purchases of the toxic assets by private investors financed by the government within weeks of the conclusion of the capital-need assessments.
The Treasury estimates it has about $135 billion left in the financial-rescue fund enacted in October. Banks that already received government funding also could get a capital boost if the Treasury agrees to convert its preferred shares into common equity. Obama administration officials haven’t said when they may need to ask Congress to approve more bailout money.
To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.netRoger Runningen in Washington at rrunningen@bloomberg.net
Last Updated: April 9, 2009 00:01 EDT |
