Top regulator says U.S bank tests to instil confidence

Wed May 6, 2009 6:56pm BST

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. By Karey Wutkowski

WASHINGTON (Reuters) - A top U.S. bank regulator said on Wednesday the release of the results of the stress tests undergone by the 19 largest banks will "be a confidence-instilling announcement."

Sheila Bair, chairman of the Federal Deposit Insurance Corp, told lawmakers that some banks will believe that the regulators were too tough in their assessments of the capital needed to survive a deep, extended recession. But she said some analysts may believe the tests were not rigorous enough.

The government plans to announce the results of the stress tests on Thursday.

Bair said those banks directed to raise their capital buffers will be encouraged to raise private capital and convert preferred shares to common equity. She said those banks will also have access to a new government capital facility as a backstop.

The results released on Thursday will offer a rare, detailed look into the government's view of the health of the banking sector and of the largest banks.

Regulators have told Bank of America (BAC.N) it needs $34 billion (22.5 billion pounds) of capital to withstand a further deterioration of economic conditions, according to an industry source familiar with the results. Citigroup (C.N) may need as much as $10 billion, according to a person familiar with the matter.

The KBW Banks stock index of 24 large banks was up more than 7 percent in midday trading on Wednesday.

Bair, speaking to the Senate Banking Committee, said all the institutions being tested have enough capital by current standards, but said "the stress test is more rigorous than currently regulatory standards for being well capitalized."

The program is designed to encourage banks to build large capital buffers they can draw down on if their credit losses mount. Officials have said the banks will be able to reverse their capital build-ups if economic conditions improve.

But many analysts have voiced doubts about how rigorous the stress tests really were, as unemployment has risen to the point where some of the assumptions in the adverse economic scenario being tested do not look far off.

Bair said house prices have not declined as much as some feared, perhaps balancing the strenuousness of the test.

However, she said regulators will need to closely watch economic conditions to make sure the banks maintain adequately large capital buffers.

"This is something that needs to continue to be monitored," she said.

(Reporting by Karey Wutkowski, editing by Gerald E. McCormick and Steve Orlofsky)

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