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Banks seeking aid to get stress test

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KAI RYSSDAL: Now that we’ve got our nomenclature right, it’s worth spending some time laying out exactly what the Financial Stability Plan is. Because what it is mostly is a delicate and political balance between not going easy on the banks that got us into this mess, and making sure everybody knows the Obama administration’s serious about fixing it. Reviews of what’s already being called the Geithner plan were mixed. Starting with one of its key features: Trying to triage which banks are the worst off.

Our Washington bureau chief John Dimsdale gets us going.

JOHN DIMSDALE: To diagnose the financial disease, Secretary Geithner borrowed a medical term. Large banks will be subjected to a “stress test” to figure out which ones have the resources to survive a punishing economy.

TIMOTHY GEITHNER: To do this, we are going to bring together the government agencies with authority over our nation’s major banks and initiate a more consistent, realistic, and forward-looking assessment about the risk on balance sheets and we’re going to introduce new measures to improve disclosure.

Once banks have gone through the stress test, they become eligible for government assistance called a “capital buffer” to help them offer loans and credit during the economic downturn.

What happens to banks that fail the test? Wayne Abernathy with the American Bankers’ Association says this isn’t like school.

Wayne Abernathy: Stress tests are not pass-fail tests. Stress tests, much like a health exam at the doctor . . . You go to the doctor who says, “You’ve got a little too much cholesterol but your heart rate is good, and I think you may want to be little careful about salt.” The purpose of the stress test is to find out where the weaknesses are.

In cases where the test reveals a lot of weaknesses, banks will be subjected to more regulatory scrutiny, says Ward McCarthy of Stone & McCarthy Research.

Ward McCarthy: They’ll find themselves in a situation where the government is increasingly involved in their activities until they are solvent enough, or strong enough, to again be set free.

Not quite nationalizing the banks, he says, but a step in that direction.

In Washington, I’m John Dimsdale for Marketplace.

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