Big banks face ’stress tests’ from regulators
WASHINGTON — The Obama administration hopes to restore confidence in the nation’s ailing financial sector by subjecting 19 of the largest banks to "stress tests" that will gauge whether each institution has adequate capital to survive another severe downturn.
Banks that are determined by the tests to need more funding will be given six months to obtain it from the private sector or, failing that, from the federal government’s $700 billion bank rescue program, the Treasury Department said Wednesday.
Treasury officials said the new support will be provided through the government’s purchase of preferred shares of the bank stock that are convertible into common shares at a 10 percent discount to their price before Feb. 9.
The preferred shares will carry a 9 percent dividend and be convertible at the bank’s option, but subject to regulatory approval.
The option to convert the preferred shares into common shares is a change in the rescue program designed to give the government greater flexibility in managing its assistance.
Common shares absorb losses before preferred shares do, which means that under a stock conversion plan, taxpayers would be on the hook if banks keep writing down billions of dollars’ worth of rotten assets, such as dodgy mortgages, as many analysts expect they will.
However, common stock in banks is incredibly cheap, and taxpayers would reap gains if the banks come back to health and the stock price rises.
The Treasury Department also provided details of how a new stress test will ensure banks have enough capital to survive a downturn even more severe than the current recession. The tests will be conducted by bank regulators, including the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision.
Administration officials did not say whether they expect to request more taxpayer money to fund the next round of investments in banks beyond general statements that they would provide the capital that banks need payday loans online.
But in his speech to Congress Tuesday
evening, President Barack Obama said more money beyond the $700 billion committed last year would be needed. Saying he understands bank bailouts are unpopular, he insisted it was the only way to get credit moving again to households and businesses. He also called on Congress to move quickly on legislation to overhaul regulations on the nation’s financial markets.
On Wednesday, the president urged key members of Congress to write tough new financial industry regulations to prevent crises and protect consumers.
Obama called for new accountability, transparency and trust in the financial markets. Among his main principles for the legislation, he said, is that government better monitor the scale and scope of risks that institutions take.
The president made his remarks Wednesday after meeting with the top Democrats and Republicans from the two House and Senate committees that will take the lead in writing the legislation.
Central to the new regulatory effort is reining in unregulated esoteric financial instruments blamed for Wall Street’s free-fall last year.
Meanwhile, Federal Reserve Chairman Ben Bernanke on Wednesday again spurned speculation that the government may nationalize Citigroup Inc. or other large financial institutions.
During an appearance before the House Financial Services Committee, Bernanke said nationalization "is when the government seizes the bank and zeros out the shareholders and begins to manage and run the bank. And we don’t plan anything like that."
But the Fed chief said it is possible the government could end up with a much bigger ownership stake in Citigroup or other banks. In the case of Citigroup, Bernanke said "we’ll see how their test works out and what evolves."