U.S. officials on bank "stress test" tightrope

By Mark Felsenthal and David Lawder - Analysis

WASHINGTON (Reuters) - U.S. officials testing the health of the nation's top banks must walk a tightrope when they disclose the exams' results: The scrutiny must be tough enough to be credible, but not so harsh as to rattle an already shaken system.

"The challenging thing here is presumably they're going to be talking about some information that is not going to be at all flattering for some institutions," said Kevin Petrasic, a banking lawyer at Paul, Hastings, Janofsky & Walker in Washington.

"How do you make sure that the information that is relevant about certain institutions is not damaging to those institutions?" asked Petrasic, a former assistant chief counsel at the Office of Thrift Supervision.

U.S. regulators are conducting "stress tests" of the 19 largest U.S. banks, including Citigroup, JPMorgan Chase & Co and Wells Fargo, to try to determine how much capital any big bank might need to weather the storm, should the already recession-bound economy turn down further.

The process enters a critical final phase on Friday, when regulators begin discussing their findings with the banks. U.S. officials also will outline publicly the process they followed in an attempt to show how rigorous the testing was.

The final results will be announced on May 4.

ASSUMPTIONS OUTLINED

Those results -- expected to reveal which banks are on the path to recovery and which ones will need further government assistance -- could prove a critical moment for financial markets still jittery about the banking sector's health.