U.S. Will Take Bank ‘Ownership’ Stakes Only as Losses Climb
By Craig Torres
Feb. 24 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the U.S. government’s bank-capitalization plan is designed to shore up lenders’ common equity only if the economy worsens and creates more losses for financial institutions.
The Treasury will buy convertible preferred stock as needed in the 19 largest U.S. banks after stress tests to determine how much capital is needed to address losses in a “worse” case scenario, Bernanke told lawmakers at a Senate Banking Committee hearing today. The shares will be converted to common only as the extraordinary losses happen, he said.
“It doesn’t have an ownership implication until such time as those losses which are forecast in the bad scenario actually occur,” the Fed chief said. Bernanke also said that the so- called stress tests that regulators will run on the 19 banks will look at potential losses over a two-year horizon if the economy worsens.
Bernanke’s remarks come after some investors expressed concern that the Treasury’s capital-injection plan would hurt banks’ shareholders and lead to government ownership stakes. The chairman added that it will be up to Treasury Secretary Timothy Geithner and the Obama administration to determine whether more bailout funds will be needed from Congress.
“How much more we’ll have to do depends on the state of the banks, it depends on how the economy evolves and it depends on the margin of safety we think we want to have,” Bernanke said today. He separately warned that “if we don’t stabilize the financial system, we’re going to founder for some time.”
Stress Tests
The stress tests “will look at the balance sheets and the capital needs of each of our 19 largest $100-billion-dollar-plus banks over the next two-year horizon,” Bernanke said in response to a question from Senator Robert Corker, a Tennessee Republican.
The assessment will use “both a consensus forecast -- where we think the economy is likely to be based on private sector forecasts -- and an alternative which is worse,” Bernanke said.
The purpose of the reviews isn’t to provide a “pass” or “fail” grade for banks. Instead, the government wants to ensure that banks can meet their obligation to lend even if the economy worsens, he said.
“The bank could convert the preferred to common to make sure that it has sufficient common equity, and only at that time, going forward, if those losses do occur, would the ownership implications become relevant,” Bernanke said.
Treasury officials are expected to provide further information about the stress tests tomorrow.
Regulators won’t let banks “hide anything” as they look at how lenders have valued their assets, and will ensure that firms are using “appropriate models” for mark-to-market accounting, Bernanke said.
“We’re going to do a tough evaluation,” the central banker said in response to a question from Senator Richard Shelby of Alabama, the Senate panel’s ranking Republican.
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