May 1, 2009 / 6:40 AM / 11 years ago

Individual "stress tests" may be unveiled

WASHINGTON (Reuters) - U.S. officials are leaning towards announcing the “stress test” results of individual banks next week instead of just summary results, a source familiar with administration talks said on Thursday.

The markets are anxiously anticipating the results and the banks’ recapitalization plans, which could dilute common shareholders at some firms. Regulators are expected to encourage some of the banks to boost their capital buffers by converting preferred shares to common equity.

The source, speaking anonymously because talks are ongoing, also said officials will likely release the capital requirements of the 19 financial firms at their holding company level, not just the needs of their banking units.

Some of the banks being tested, such as Bank of America, have large non-bank subsidiaries that were included in the assessments, the source said.

Regulators have stress-tested the 19 largest U.S. banks to determine their capital needs should economic conditions deteriorate further. The source said the announcement of the results has been pushed back, possibly to May 6.

The plan on exactly how to release the results “is not very far along,” the source said, adding that regulators are looking to disclose a lot of supervisory information about banks that is usually kept confidential.

The information has the potential to alarm investors and send certain bank stocks lower, depending on how large the capital needs are found to be.

Officials have said banks will be encouraged to turn to their own stakeholders first to build capital by extending conversion offers to their preferred shareholders.

Regulators are putting more emphasis on common equity, because they say it is more flexible and can absorb losses better than other forms of capital.

Conversion offers lessen the chances government officials will have to seek more bailout funds from Congress in the near future.

The pain for equity holders could be balanced by an overall stabilization in the banking sector if officials reiterate their promise to stand behind the 19 firms, said Lou Crandall, the chief economist at Wrightson ICAP.

“Clarifying exactly how the bank holding companies as a whole will be recapitalised can be a positive for debtholders and the system as a whole, while still being a negative for shareholders and holders of equity,” Crandall said.

The stress-test program has evolved since the Treasury Department announced in February that it was embarking on the exams as a way to learn what additional help the top banks might need.

Officials said back then that the banks would learn how much extra capital regulators wanted them to have, and then the firms would have six months to raise that amount in the private market or could tap a new government capital facility.

Since then, the market appetite for the results has reached a fever pitch, forcing the Treasury Department to rethink its plan to keep detailed results of individual banks private.

The source said officials are well aware of the market’s sensitivity to the information, evidenced by the punishment some bank stocks have endured from leaked reports of the results and outside analysts’ versions of the tests.

A Treasury spokesman did not respond to a request for comment.

“We’re now talking about a process that’s as much a public relations exercise as it is divulging information regarding the financial health of the 19 largest banks,” said Kevin Petrasic, who served at the Office of Thrift Supervision from 1989 to 2008 and is now an attorney at law firm Paul Hastings in Washington.

The government gave their preliminary results to the banks last Friday, and regulators are now negotiating the results and any capital recovery plans with the banking companies.

One point of contention is how to disclose information that is supervisory in nature and not generally designed for market consumption.

Petrasic says many times the information that examiners work with is specific to an institution’s portfolios and should not necessarily be used to gauge the health of the banking system.

“Once you try to take that information and extrapolate it, it gets very complicated and it’s dangerous,” he said.

The institutions undergoing stress tests include Citigroup Inc, Bank of America, Goldman Sachs Group, JPMorgan Chase, Morgan Stanley, MetLife, Wells Fargo, PNC Financial Services Group, US Bancorp, Bank of NY Mellon, SunTrust Banks, State Street, Capital One Financial, BB&T, Regions Financial, American Express, Fifth Third Bancorp, KeyCorp and GMAC.

Reporting by Karey Wutkowski; Editing by Brian Moss and Tim Dobbyn

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