Big banks face survival 'stress tests' from regulators

— -- The Obama administration Wednesday unveiled details of its plan to "stress test" major banks to ensure they can weather a deep downturn, while saying it would also give lenders immediate access to needed capital.

The Treasury Department and other regulators are starting a major evaluation of the nation's 19 largest bank holding companies, with assets of $100 billion or more.

Examiners will evaluate whether lenders have enough capital to withstand losses under two scenarios — one based on a consensus economic forecast through 2010, and another worst-case scenario in which the economy dives by a steep 3.3% in 2009, unemployment hits 10.3% next year and home values plunge 29% through 2010. The government will look at lenders' projected earnings, the quality of their capital and their risk outlook.

After finishing the exams in April, regulators will tell banks how much capital they need. Treasury will commit to providing the funds, but will give banks six months to try to raise private capital.

Aid will come via purchases of preferred stock, carrying a 9% dividend. The stock can be converted into common stock at a 10% discount, a move that would bolster balance sheets, but also give the government voting rights like any other shareholder. Common stock investments add more strength to banks' capital position than preferred stock.

"To the extent that significant government stake" occurs, the goal will be to keep federal ownership "as temporary as possible," Treasury said.

Fed Chairman Ben Bernanke underscored that point. "I think of nationalization as ... zeroing out stockholders and then putting the government in charge of running the institution. I don't think we want to do that," he told a House committee.

Some banks worry that the stress test could worsen their financial situation if regulators force them to take actions based on a severe economic scenario that isn't likely to occur.

"You never want to say it can't help, but the risk is that it's going to exacerbate" banks' conditions, said Wayne Abernathy, an executive vice president of the American Bankers Association.

The plan would be funded from the $700 billion financial rescue law enacted last year. The cost of the new bank lending program won't be known until the stress tests are complete.

Christopher Whalen, co-founder of Institutional Risk Analytics, said the capital won't be enough to nurse banks back to health. The government eventually will have to mark down banks' toxic assets and wipe out their liabilities, he said.