Time to Cram? Government Sets Bank 'Stress Tests'

Feb. 25, 2009 — -- If today's ravaged economy falls into even more dire straits, will your bank survive?

That's what multiple federal agencies will try to determine starting today as the government kicks off the Capital Assistance Program, a new effort by the Obama administration that is designed to ensure major U.S. banks play a role in the recovery of the American economy.

"We're going to do an honest evaluation. We're going to do a tough evaluation [to] try to figure out how much hole there is, if there is a hole," Federal Reserve Chairman Ben Bernanke said Tuesday in testimony before the Senate Banking Committee.

Under the program, the country's largest banks will undergo "stress tests" performed by the government. The tests will measure if banks can weather what-if economic conditions that could emerge over the next two years, which analysts say could include much higher unemployment and further drops in home values.

If they can't, the banks stand to receive more federal aid on top of the hundreds of billions already provided by the Troubled Assets Relief Program under the Bush administration. The program, according to a government statement released this week, calls for the banks to seek private investment before turning to the government for a "temporary capital buffer."

Tuesday Bernanke rejected concerns that the government's assistance to the banks would ultimately result in nationalization -- a fear that contributed to turmoil in the stock market earlier this week.

"It's not nationalization, because the banks would not be wholly owned or probably not even majority owned by the government. The government will be a shareholder, along with private shareholders," he said.

Some say that government regulators tasked with keeping tabs on the banks should already know whether they would survive an even deeper downturn. But the stress tests could help reassure a public unnerved by the distribution of the government's original TARP funds.

"Taxpayers need accountability, and using a stress test is one method of the government showing, 'We've looked at these banks -- this is a prudent investment for the taxpayers to make,'" said Morningstar banking analyst Jamie Peters.

In his address before a joint session of Congress Tuesday night, President Obama sought to distinguish early TARP spending from his adminstration's plans.

"I understand that when the last administration asked this Congress to provide assistance for struggling banks, Democrats and Republicans alike were infuriated by the mismanagement and results that followed. So were the American taxpayers. So was I," he said. " So I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions."

Obama said he would hold the banks "fully accountable for the assistance they receive."

"And this time," he said, "they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer."