U.S. regulators bracing for bank stress test battle

By Karey Wutkowski and Patrick Rucker

WASHINGTON (Reuters) - U.S. regulators have reached the closing phase of "stress tests" to gauge the health of the nation's top banks, and are bracing for a battle to get those firms to accept tough appraisals.

Officials realize it may be hard to keep the assessments under wraps, and they are looking for ways the banks could disclose some details without causing havoc in the markets, regulatory sources say. If a bank needs more capital, any disclosures would likely come in concert with a recovery plan that could include government aid and private assistance.

"There will be definitely be some information that will be provided at the end of it, but exactly what that will be, and when it will be provided, will come forth later," Comptroller of the Currency John Dugan, who supervises some of the nation's largest banks, said on Tuesday on the sidelines of a bank conference.

The stress tests at the nation's 19 biggest banks are part of a wide-ranging effort to restore stability to a sector wracked by huge mortgage-related losses. Another key plank is a public-private program to buy toxic assets from banks, which aims to clear the way for them to attract private capital.

Bank share prices, which dropped 50 percent last year, have fallen a further 35 percent so far this year. Investors have worried that mounting losses could lead the government to take firmer control of some institutions, if not to nationalize them outright.

Shares at Citigroup and Bank of America, two recipients of government bailout packages, have been particularly hard hit.

"I think these banks are going to be staring at some big shortfalls. If there had been a way to paper over this, the government would have done that by now," said Dean Baker, co-director of the Center for Economic and Policy Research.

The regulatory stress tests announced by the U.S. Treasury on February 10 aim to determine how much capital the largest banks might need should the economy's performance turn out to be much weaker than expected.