Fallout: The Financial Crisis

What’s next for banks after stress tests

John Dimsdale Apr 9, 2009
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Fallout: The Financial Crisis

What’s next for banks after stress tests

John Dimsdale Apr 9, 2009
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TEXT OF STORY

Kai Ryssdal: Th news from Wells Fargo today comes as government regulators are wrapping up their survey of the banking sector. Treasury Secretary Timothy Geithner calls them stress tests. For the past couple of months, federal bank examiners have been running 19 big institutions through computer simulations. How they’d do if the economy contracts even more and stays down longer than projected. What if unemployment hits double digits over the next year, or if home prices fall another 20 percent? President Obama will be briefed on the results and what he should do with them tomorrow. Marketplace’s John Dimsdale reports now from Washington.


JOHN DIMSDALE: The banks can’t fail these tests, but if they break under the virtual stress, regulators can require more capital reserves or changes in management or business strategy.

The FDIC, which tests bank assets all the time, issued a statement today saying the stress assessments are necessary to assure regulators that banks are strong enough to weather the economic storm. Regulators are not allowed to talk about how the tests were conducted or the results. But Chris Low, chief economist at FTN Financial in New York, hears the tests have been thorough.

CHRIS LOW: Most of the reports suggest that they were a lot more rigorous than the bankers themselves expected. So, I think they will be treated as effective means of measuring the durability of banks.

The question now is what should be done with the results.

BARBARA MATHEWS: The most important thing from my perspective is that the outcome of the stress test is not destiny.

Barbara Mathews is a former government regulator and now a private consultant. She says good test results will be a magnet for private investors, while bad grades will be just the opposite.

MATHEWS: It becomes very tricky, though, doesn’t it? Say you’re a bank. “Hi, my stress test came out really badly. Please could you give me money?” That’s a very difficult sell to a private capital market.

The test results will be good tools for regulators, she says. But communicating them properly to the public, without raising concerns in an already frightened market, will be a challenge for the administration.

In Washington, I’m John Dimsdale for Marketplace.

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