Fed says gov't won't let stress-tested banks fail

WASHINGTON -- The Federal Reserve says the government is prepared to rescue any of the banks that underwent "stress tests" and were deemed vulnerable if the recession worsens sharply.

The Fed says the 19 companies that hold one-half the loans in the U.S. banking system won't be allowed to fail — even if they fared poorly on the stress tests.

The tests are intended to measure whether banks have enough capital to withstand losses on mortgages and other assets if unemployment rises and home prices fall further.

Bank executives were being briefed on their test results in meetings across the country Friday. By law, the banks cannot publicize the results without the government's permission, but Wall Street buzzed with anticipation. Results aren't supposed to be publicly released until May 4.

Investors will be scrutinizing the test methodology for clues about which banks are in trouble.

The slow-motion rollout is intended to blunt market reaction to the news of which banks are healthy, which ones could fail if the recession worsens and which need more money to survive.

News reports, including a confidential outline of the tests first reported by The Associated Press this week, have led analysts to start handicapping which banks could fail.

"I'm worried about the overreaction — people selling every bank short and pulling out all their deposits and hiding their money in the mattress," said Scott Talbott, a lobbyist with the Financial Services Roundtable, which represents the biggest financial firms.

Regulators are striving to release enough information about the stress tests to inspire confidence. But they don't want to give analysts so much detail that they can run their own tests on the banks before the official release of results.

The stress tests subject banks' balance sheets to two scenarios. One reflects current forecasts for the recession. The other assumes the recession will worsen, according to the document, produced by the Federal Reserve.

Officials also are examining the quality of banks' loans, according to an industry official and a regulatory official who spoke on condition of anonymity because they weren't authorized to discuss the tests publicly.