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Bank stress test results delayed until Thursday

The Federal Reserve will release "stress tests" results for the nation's biggest banks on Thursday, according to a government official.
/ Source: The Associated Press

The Federal Reserve will release “stress tests” results for the nation’s biggest banks on Thursday, according to a government official.

Deliberations between banks and regulators about the tests’ results pushed back the release date, which initially was expected to be earlier in the week.

In addition to an overall snapshot of the health of the 19 large banks being assessed, the Fed will provide detail about individual banks, according to the official, who spoke on condition of anonymity because of the sensitive nature of the matter.

The Fed will describe the resources banks would need to absorb losses on certain types of loans and investments under adverse economic conditions.

Last week, Fed officials said that all 19 banks that underwent stress tests will need to keep an extra buffer of capital reserves beyond what’s now required, in case losses continue to mount. That would mean some banks will likely have to raise additional cash.

If they do, banks will have up to six months to raise the money from private companies, Federal Reserve Chairman Ben Bernanke has said. If they can’t, then the government would provide assistance.

One option for help: allow the government to sharply increase its stakes in banks. That would be done by converting the government’s stock in banks from preferred to common shares. It wouldn’t require any additional taxpayer money, although it would increase their risks.

Another option: having the government make a fresh capital infusion in a bank using taxpayer money from the $700 billion financial bailout pot.

The tests were conducted to help regulators decide whether the banks have sufficient capital — and the right mix of it — to withstand any additional shocks to the economy over the next two years.

Regulators are faced with a challenge over how to balance making information public without roiling financial markets. If they provide too much detail, banks singled out as needing more capital could be punished by investors. Too little could undermine credibility in the process, which could damage efforts to shore up banks.

In the tests, the Fed put banks — including Citigroup, Bank of America and Goldman Sachs — through two hypothetical scenarios to see how much much of a financial hit banks would take on loans and other assets.

One looks at how banks would fare over the next two years based on how the economy was doing in February. The second, more important scenario, assumes the economy will be in a deeper recession than analysts anticipated. It assumes that gross domestic product would decline by 3.3 percent this year and unemployment would reach 10.3 percent in 2010.

In that worsened economic scenario, consumers and businesses would have more trouble paying back the money banks have lent them for home mortgages, credit cards and commercial real estate. The loans and other assets would become less valuable. Regulators are forcing banks to set aside money to make sure they can survive those losses.

Citigroup and Bank of America will need to raise more capital, sources told The Associated Press earlier this week.

Together the banks have already received money from the government’s bailout fund, plus they have been given government guarantees on billions of dollars worth of risky loans.

Investors, meanwhile, have grown more concerned about regional banks with a lot of risky loans on their books. If the recession were to take a turn for the worse, defaults on those loans could soar. Banks that carry such loans, including KeyCorp and SunTrust Banks Inc., are likely to be asked to improve their capital reserves, according to analysts.

Repairing the nation’s banking system and getting credit flowing more freely to people and businesses is a necessary ingredient for trying to lift the country out of a recession that has dragged on since December 2007.

Fallout from the housing, credit and banking crises — the worst since the 1930s — has badly pounded banks. A growing number have failed and others have suffered huge losses.

Last week, the International Monetary Fund estimated that total losses on loans and securities originating in the United States at $2.7 trillion from 2007 to 2010. It also estimated that $275 billion more in capital would be needed to cushion against further losses.