SCENARIOS: After stress tests, what next for U.S. banks?

Undercapitalized banks would have the option of turning to the government for investment immediately or later if they have trouble raising private capital. Washington's previous bank investments came with strings attached, like limits on executive pay. The capital infusions would be in the form of preferred securities that could convert to common equity at the issuer's option, subject to approval by their regulator.

CONVERT GOVERNMENT'S PREFERRED STAKES

If the stress tests show that the top banks have a capital need that exceeds the amount left in the $700 billion market rescue fund, the government could seek to convert its existing preferred stakes to common equity as a low-cost way to boost the banks' capital levels. Treasury has said it is open to considering that option if a bank's regulator deems it would be best for the long-term stability of that institution.

OTHER MEASURES

If a bank was in desperate need of capital and in danger of failing, officials could take other measures to prevent a systemically important firm from causing widespread disruption. The Obama administration wants Congress to give the government the ability to take control of large, interconnected financial firms to wind them down. The proposed legislation would also give the Federal Deposit Insurance Corp the power to make loans to a troubled bank while keeping it open, buy a stake in the firm, assume obligations, take a lien on the firm's assets, or sell off the firm's assets.

TARP REPAYMENT

Banks that are found to have performed well under the stress test conditions may get put on a path to repay the Troubled Asset Relief Program (TARP) funds. Administration officials have told the top banks that they do not want the banks to pay back the funds until they can demonstrate that doing so will not constrain their lending activities. To repay the funds, a bank has to get the green light from its primary regulators. Treasury also has the power to write the terms of the repayment, according to legislation passed in February.

(Reporting by Karey Wutkowski and Patrick Rucker; Editing by Tim Dobbyn)