MarketWatch: Inching toward the worst case (Bank stress tests)

[marmar]

Pessimistic scenario gains stress-test influence
Neither government nor banks will disclose key details about loan portfolios

By Ronald D. Orol, MarketWatch


WASHINGTON (MarketWatch) -- Results of the government stress tests government being conducting on the 19 largest financial institutions are expected to be released May 4, but industry lawyers argue that the release is likely to be less of an event that many observers have hoped.

"What we will see is high-level capital ratios that show each bank is a viable institution at current conditions," said Jeffrey Hare, a partner at Alston & Bird LLP in Washington. "Bank regulators don't want to show something that could be misunderstood and create undue panic to the system."

Financials fall out of favor on Friday after Citi reported results that showed bank earnings were helped by government aid, but customers are still struggling. (April 17)The stress tests are to determine whether each bank has sufficient capital reserves to cover loan losses over the next couple of years based on a series of economic projections for that period. Based on each stress test, Treasury and bank regulators will decide if the government needs to provide additional capital to the banks. The Office of the Comptroller of the Currency and the Federal Reserve are conducting the tests.

Worst-case scenario?

Those forecasts include a pessimistic scenario the Treasury released Feb. 25 under which the unemployment rate rises to 8.9% by the end of this year with home prices falling an additional 22% for the same period.

However, many aspects of the negative scenario are, in fact, coming to pass. Joblessness rose to 8.5% by the end of March, and the Standard & Poor's/Case-Shiller Home Price Index, on which the Treasury Department's pessimistic housing scenario is based, indicated March 31 that home prices had fallen 19% in the 12 months ending in January. ..........(more)

The complete piece is at: http://www.marketwatch.com/news/story/Pessimistic-scenario-gains-influence-bank/story.aspx?guid=%7BD8144872%2DA7A2%2D4323%2D8AF3%2DE5454E77DEA8%7D