Bailout panel: bank stress tests need repeating

By David Lawder

WASHINGTON (Reuters) - Bank stress tests should be repeated under more adverse assumptions and over a longer period because the worst-case unemployment rate used in recent tests will soon be exceeded, the head of the U.S. bailout watchdog panel said on Tuesday.

"We have not actually broken through the worst-case scenario, but let's face it, the numbers are bad and they're heading in the wrong direction," Congressional Oversight Panel chairman Elizabeth Warren told the Joint Economic Committee of the U.S. Congress.

In a monthly report released earlier on Tuesday, the panel said the stress tests should be repeated periodically as long as banks continue to hold "appreciable amounts" of toxic assets.

Warren said the U.S. unemployment rate average for 2009, now at 8.5 percent, will soon exceed the 8.9 percent as the worst-case scenario used in regulators' capital evaluations of the 19 largest U.S. bank holding companies. The unemployment rate for May was 9.4 percent and many analysts expect it to continue to climb.

"The worst-case scenario number for 2009 is in fact not the worst case. We're going to see worse numbers," added Warren, a Harvard Law School professor.

The monthly report from the panel said the stress tests, ordered by the U.S. Treasury Department for the top 19 U.S. bank holding companies, used a risk-modeling approach that on the whole was "reasonable and conservative".

But the panel noted that it is impossible for an outside party to replicate the loss projections that form the core of the tests.

The stress test results on May 7 caused many investors to breathe a sigh of relief when regulators ordered 10 of the top 19 U.S. banks to raise nearly $75 billion in new capital, far less than feared. Since then, the tested banks as a group have executed or announced share sales totaling about $65 billion.