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Tests of Banks May Bring Hope More Than Fear
By DAVID LEONHARDT for the New York Times
Published: May 3, 2009
The results of the bank stress tests to be released by the Obama administration this week are expected to include more detailed information about individual banks — assessing specific parts of their loan portfolios — than many analysts have been expecting.
if (acm.rc) acm.rc.write();Using these results, the administration seems prepared to argue that, while a few banks may need additional money, the broad financial system is healthier than many investors fear.
At the core of the test will be a judgment about whether each of the country’s 19 biggest banks has enough money to withstand a deep recession and, if not, how much more capital it needs to be able to lend at a healthy pace, according to regulators. Unless regulators change course this week, the tests are also likely to forecast potential losses in individual slices of the credit markets, like residential mortgages, credit card loans and commercial loans, for each bank over the next two years.
The administration is expected to make the case that the needs of the troubled banks can be met with the bailout funds that Congress has already approved. That would be a departure from what administration officials were saying as recently as March and evidently reflects the recent improvement in banks’ conditions.
“None of these banks are insolvent,” said a senior government official, who did not want to be identified before the public release of the test results.
The official added: “These are manageable losses.”
The stress tests are one more example of the extraordinary ways that the government is intervening in the economy, to cushion the blow from the current financial crisis and recession. Having already propped up the credit markets and the automobile industry, officials are now putting the finishing touches on an exercise with no obvious precedent.
On Thursday afternoon, regulators expect to publish an analysis of the banks’ assets, akin to a sprawling research report written by a Wall Street analyst but one that comes with the government’s imprimatur. In effect, Treasury Department and Federal Reserve regulators will be handing over information to investors so that they can decide which banks they want to invest in — and which will ultimately need more bailout money.
The analysis could become a template for future financial regulation.
One way or the other, the stress tests have the potential to be a turning point in the financial crisis. If the tests fail to instill confidence, it will be the clearest sign to date that economists who have criticized the administration may be right that its rescue plan has not been aggressive enough.
President Obama may then need to ask a wary Congress for billions of extra dollars to shore up the credit system and perhaps even take over one or more large banks. Such moves, coming just after the administration offered a hopeful picture, could create political difficulties.
But if the test results can persuade investors that many banks are in the early stages of recovery, investors may then become more willing to invest in relatively healthy firms, like Goldman Sachs and JPMorgan Chase, which, in turn, would become more comfortable making loans.
“Everything has been in limbo, waiting for the stress tests to get out of the way,” Louis Crandall, chief economist at Wrightson ICAP, a research firm. With the results, Mr. Crandall said, “we’ll start to get a sense for the extent to which the financial system can recapitalize itself.”
In particular, the administration may use the data from the tests to argue that many banks now have a greater cushion than they did in past financial crises, like the Latin American debt crisis of the 1980s. Then, some banks in the United States appeared to be insolvent, only to recover.
The banks whose reserves are judged insufficient — Bank of America, Citigroup and a few regional banks lead the list of likely suspects — will be given six months to shore up their position, before being required to accept government money. The most obvious ways to do so will be to find new investors willing to buy a stake or to persuade existing owners of preferred stock (which is akin to a loan) to renegotiate their stakes.
Another possibility is that the government may encourage significant cost-cutting. That could lead to layoffs and leave some of the world’s largest companies far smaller than they once were. Last week, Citigroup agreed to sell a brokerage firm to a Japanese financial group, largely to raise capital.
Administration officials have said they will not allow any large bank to fail even if the economy takes another turn for the worse and they must go back to Congress for more money.
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By DAVID LEONHARDT for the New York Times
Published: May 3, 2009
The results of the bank stress tests to be released by the Obama administration this week are expected to include more detailed information about individual banks — assessing specific parts of their loan portfolios — than many analysts have been expecting.
if (acm.rc) acm.rc.write();Using these results, the administration seems prepared to argue that, while a few banks may need additional money, the broad financial system is healthier than many investors fear.
At the core of the test will be a judgment about whether each of the country’s 19 biggest banks has enough money to withstand a deep recession and, if not, how much more capital it needs to be able to lend at a healthy pace, according to regulators. Unless regulators change course this week, the tests are also likely to forecast potential losses in individual slices of the credit markets, like residential mortgages, credit card loans and commercial loans, for each bank over the next two years.
The administration is expected to make the case that the needs of the troubled banks can be met with the bailout funds that Congress has already approved. That would be a departure from what administration officials were saying as recently as March and evidently reflects the recent improvement in banks’ conditions.
“None of these banks are insolvent,” said a senior government official, who did not want to be identified before the public release of the test results.
The official added: “These are manageable losses.”
The stress tests are one more example of the extraordinary ways that the government is intervening in the economy, to cushion the blow from the current financial crisis and recession. Having already propped up the credit markets and the automobile industry, officials are now putting the finishing touches on an exercise with no obvious precedent.
On Thursday afternoon, regulators expect to publish an analysis of the banks’ assets, akin to a sprawling research report written by a Wall Street analyst but one that comes with the government’s imprimatur. In effect, Treasury Department and Federal Reserve regulators will be handing over information to investors so that they can decide which banks they want to invest in — and which will ultimately need more bailout money.
The analysis could become a template for future financial regulation.
One way or the other, the stress tests have the potential to be a turning point in the financial crisis. If the tests fail to instill confidence, it will be the clearest sign to date that economists who have criticized the administration may be right that its rescue plan has not been aggressive enough.
President Obama may then need to ask a wary Congress for billions of extra dollars to shore up the credit system and perhaps even take over one or more large banks. Such moves, coming just after the administration offered a hopeful picture, could create political difficulties.
But if the test results can persuade investors that many banks are in the early stages of recovery, investors may then become more willing to invest in relatively healthy firms, like Goldman Sachs and JPMorgan Chase, which, in turn, would become more comfortable making loans.
“Everything has been in limbo, waiting for the stress tests to get out of the way,” Louis Crandall, chief economist at Wrightson ICAP, a research firm. With the results, Mr. Crandall said, “we’ll start to get a sense for the extent to which the financial system can recapitalize itself.”
In particular, the administration may use the data from the tests to argue that many banks now have a greater cushion than they did in past financial crises, like the Latin American debt crisis of the 1980s. Then, some banks in the United States appeared to be insolvent, only to recover.
The banks whose reserves are judged insufficient — Bank of America, Citigroup and a few regional banks lead the list of likely suspects — will be given six months to shore up their position, before being required to accept government money. The most obvious ways to do so will be to find new investors willing to buy a stake or to persuade existing owners of preferred stock (which is akin to a loan) to renegotiate their stakes.
Another possibility is that the government may encourage significant cost-cutting. That could lead to layoffs and leave some of the world’s largest companies far smaller than they once were. Last week, Citigroup agreed to sell a brokerage firm to a Japanese financial group, largely to raise capital.
Administration officials have said they will not allow any large bank to fail even if the economy takes another turn for the worse and they must go back to Congress for more money.
more
