(Adds background on Geithner bank plan, analyst comment)
By David Lawder
WASHINGTON Feb 21 U.S. financial regulators
will soon launch a series of "stress tests" to determine which
of the largest U.S. banks should get bigger capital cushions in
case of a deeper recession, a person familiar with Obama
administration plans said on Saturday.
The person, speaking on condition of anonymity, said if
institutions were found to need additional capital, financial
authorities would provide them with an "extra cushion of
Banks are expected to receive additional information about
the tests in the coming week from regulators.
The largest U.S. banks are "well capitalized" for current
conditions, the source said, but the Obama administration wants
to ensure they can withstand a more severe economic climate and
play an important role in helping restart the flow of credit.
Initial plans for the stress tests were announced on Feb.
10 as part of Treasury Secretary Timothy Geithner's bank
stabilization plan, but the source on Saturday for the first
time linked the tests to additional government support for
large banks. That person did not specify what form any extra
capital cushion may take.
Little is known about the form of the stress tests, but the
person described them as "consistent, forward looking and
The Obama administration tried on Friday to ease market
fears the government was poised to nationalize some large banks
that are struggling with losses and a lack of confidence,
notably Citigroup (C.N) and Bank of America (BAC.N).
Bank shares fell sharply, with Citigroup plunging 22
percent to below the $2 fee of a typical automated teller
machine, or ATM, and Bank of America trading around the $4
White House spokesman Robert Gibbs said on Friday, "This
administration continues to strongly believe that a privately
held banking system is the correct way to go."
That was quickly echoed by a statement from the U.S.
INVESTORS LOSE CONFIDENCE
Citigroup and Bank of America have each received $45
billion in government capital in recent months and guarantees
against losses on portfolios of illiquid mortgage assets -- aid
that now exceeds their market value.
With investors losing confidence in the sector as
recessionary losses on real estate and commercial loans mount,
analysts say the government may have to do more to prop up the
But rather than opting for a sweeping takeover, the
government may act more incrementally, demanding a little more
control every time Bank of America or Citigroup seeks more
capital, analysts said.
Major interventions in financial institutions, such as Bear
Stearns 11 months ago, American International Group (AIG.N) in
September and a second-round investment in Citigroup, occurred
just after major drops in share prices made it clear they could
not raise private capital.
The government "will try to do everything they can before
they nationalize banks, but they may ultimately do it," said
Lee Delaporte, director of research at Dreman Value Management,
which has $10 billion under management.
"The bank stocks are telling you nationalization is going
to happen," Delaporte added.
Thus far, the Treasury has put up about $235 billion for
banks largely by purchasing only preferred shares to avoid
diluting common shareholders. Under Geithner's revamp, those
injections could come in the form of shares that could be
converted to common equity if necessary.
The lack of detail in Geithner's bank plan, particularly
about a $500 billion to $1 trillion public-private fund to soak
up toxic assets, has fueled investor concerns that bank
takeovers could become an option. Geithner did not specify how
much money would be earmarked for bank capital injections under
the plan, which mapped out how the second $350 billion of the
$700 billion bailout fund would be spent.
Geithner has devoted $50 billion to modify troubled
mortgages and $100 billion to support a $1 trillion Federal
Reserve asset-backed securities lending facility aimed at
unblocking frozen consumer credit markets.
Lawmakers have pressed Geithner on whether and when he will
return to seek more funding to shore up the banking system.
Geithner told Congress on Feb. 11 that as the "design elements"
of his plan were fleshed out, he would have a better handle on
the ultimate risks and costs for the program.
(Additional reporting by Dan Wilchins in New York; Editing by