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‘Stress tests’ harder on regional banks

The government's "stress tests" of 19 large banks take a harsher view of loans than of other troubled assets, which favors a few Wall Street banks while potentially threatening regional players.
/ Source: The Associated Press

The government's "stress tests" of 19 large U.S. banks take a harsher view of loans than of other troubled assets, according to a Federal Reserve document obtained by The Associated Press. That approach favors a few Wall Street banks while potentially threatening major regional players.

Regulators will use the tests to determine which banks are healthy, which need more capital and which might fail if the recession worsened.

The Fed is scheduled to detail its methodology for the tests on Friday and release the results May 4.

The regulators' focus could spell trouble for big regional banks undergoing the tests. Their portfolios have more individual loans and fewer of the big pools of securitized loans that Wall Street giants specialize in.

Some analysts said regulators are favoring the largest banks because if even one failed that would pose a severe economic risk. Banks that deal in securities are more interconnected to other corners of the global financial system.

Regulators also face pressure to highlight the weaknesses of some banks, or critics will dismiss the tests as a whitewash. That would undermine the goal of improving confidence in the financial system.

Under one scenario, the test assumes banks will see "no further losses" on these complex securities at the heart of the credit crisis. By contrast, it estimates that the banks' individual loans will lose up to 20 percent of their value.

The methodology "certainly penalizes those banks that are more involved in traditional banking, which frankly have been performing better in recent months," said Wayne Abernathy, a former Treasury Department official now with the American Bankers Association.

He said banks' loan portfolios have lost only about 5 percent of their value so far, whereas the value of complex securities are down 30 to 40 percent.

A spokesman for the Federal Reserve would not comment. A Treasury Department spokesman referred questions to the Fed.

Regulators are running the tests on all financial institutions with assets of at least $100 billion. The 19 institutions on the list include an insurer, Wall Street brokerages and regional banks, such as Cincinnati-based Fifth Third Bancorp and Cleveland-based Keycorp.

A spokeswoman for Fifth Third Bancorp said the bank would not comment.

Keycorp did not immediately respond to requests for comment. The bank said Tuesday it lost $488 million in the first quarter, partly due to a large increase in its set-asides for loan losses.