Trying to defuse the U.S. bank test bomb

By Karey Wutkowski - Analysis

WASHINGTON (Reuters) - The Obama administration faces one of its most sensitive financial decisions yet -- how to release the results of stress tests on the 19 largest U.S. banks without sending the weaker ones into a tailspin.

Intense investor interest and a desire among stronger banks to leak their results to differentiate themselves from rivals has caused regulators to abandon any hope of keeping the results under wraps.

The latest government plan is to release some form of the results in May and experts say Washington needs to be able to offer a clear message about how it will deal with weaker banks without risking the collapse of those institutions.

"The problem is that by putting somebody's name out there as being weak, the likelihood of having a run (on a bank) is pretty substantial." said Gil Schwartz, a former lawyer at the Federal Reserve who now works in private practice.

The tests were announced in February as a seemingly straightforward assessment of what additional capital banks would need if the economy deteriorates further.

Although the U.S. Treasury has said the tests are not pass/fail, the fear is that the markets will view institutions requiring more capital as failing.

Banks found to need more capital are meant to have six months to raise the funds in the market or seek an immediate government capital infusion.

Questions linger about whether regulators will go further than capital injections and other already announced plans to purchase toxic asset off banks' balance sheets.