Secrecy of U.S. bank stress tests strains release rules

By Martha Graybow and Karey Wutkowski - Analysis

NEW YORK/WASHINGTON (Reuters) - U.S. banks have been told to keep quiet for now about results of a sweeping regulatory checkup into their health, raising questions about whether investors are being wrongly kept in the dark.

Government officials have been less than clear about how the results of these "stress tests" of 19 big banks will be released.

In the meantime, the Treasury Department and Federal Reserve have asked banks not to discuss the exams publicly out of concern that information will trickle out inconsistently and create market chaos, according to a source familiar with the talks between the government and the banks.

But some experts complain there is too much secrecy surrounding the tests, which are designed to determine whether the banks would be able to weather a steeper economic downturn.

They say banks should release results as they learn them, because anything else goes against traditional disclosure rules that govern what companies must tell investors.

"For 75 years, we have had a regulatory philosophy that investors need information," said Robert Hillman, a securities law professor at the University of California at Davis. "We are now turning that on its head, and saying investors won't know how to use information they do get."

Banks are getting mixed messages from regulators about whether the stress tests should be considered a bank examination, which is not permitted to be disclosed, or a material event, which triggers a disclosure requirement, according to an industry source.

A material event typically is something "sufficiently important that a reasonable investor would want to know about it," said Jill Fisch, a law professor at the University of Pennsylvania who specializes in securities issues.