Fed Stress Tests Harder On Regional Banks (And Favor Wall Street Institutions)

[KittyWampus]

Source: AP

AP Exclusive: Fed tests harder on regional banks
By DANIEL WAGNER, AP Business Writer Daniel Wagner, Ap Business Writer – 48 mins ago

WASHINGTON – The government's "stress tests" of 19 large banks take a harsher view of loans than of other troubled assets, according to a Federal Reserve document obtained by the Associated Press. That approach favors a few Wall Street banks while potentially threatening major regional players. Regulators will use the tests to determine which banks are healthy, which need more capital and which might fail if the recession worsened.

snip

The regulators' focus could spell trouble for big regional banks undergoing the tests. Their portfolios have more individual loans and fewer of the big pools of securitized loans that Wall Street giants specialize in.

Some analysts said regulators are favoring the largest banks because if even one failed that would pose a severe economic risk. Banks that deal in securities are more interconnected to other corners of the global financial system. Regulators also face pressure to highlight the weaknesses of some banks, or critics will dismiss the tests as a whitewash. That would undermine the goal of improving confidence in the financial system.

Under one scenario, the test assumes banks will see "no further losses" on these complex securities at the heart of the credit crisis. By contrast, it estimates that the banks' individual loans will lose up to 20 percent of their value.

The methodology "certainly penalizes those banks that are more involved in traditional banking, which frankly have been performing better in recent months," said Wayne Abernathy, a former Treasury Department official now with the American Bankers Association. He said banks' loan portfolios have lost only about 5 percent of their value so far, whereas the value of complex securities are down 30 to 40 percent.

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Read more: http://news.yahoo.com/s/ap/20090421/ap_on_bi_ge/us_banks_stress_tests

[kirby]

1. Sounds like BS to me...

Sounds like a piece put out by the American Bankers Association.

[BR_Parkway]

2. So the big banks will buy up the regionals cheap and improve their

capital positions at the same time. Color me surprised

[amandabeech]

3. If true, it appears that the Treasury is allowing the big bank conglomerates

to use fantasy mark-to-model valuations on mortgage-backeds, credit default swaps and interest rate swaps instead of any price close to what could be had in the market today.

I think that's the wrong pricing model for the stress tests because the stress tests are supposed to help figure out what would happen if catastrophe strikes. In my version of catastrophe striking, the banks would have to sell assets very, very quickly to raise liquid capital, including assets that the bank plans to hold for a couple of years.

I think that Barofsky and Warren are going to have to get some sort of subpoenas immediately to find out what is going on in Treasury before it is simply too late.

Every news item that comes out of Treasury seems to be more and more troubling.

I phone banked for Obama knowing that I wasn't going to be happy with his economic team and policies even though he was and is light years ahead of McCain on everything else.

However, I never thought that I would be in this much disagreement or have this much suspicion about the brainwashing and motives of his eonomic team. It is not as bad as the early days of Reagan, but it's getting too close, and, frankly, I'm frightened.

[w4rma]

4. I get more and more pissed off at Obama's economic team, every day, it seems.

This is what happens when your economic team is full of corrupt DLCers and Republicans.

[No Elephants]

5. Sure, let's protect only the banks that are "too big to fail" and let them get even

bigger, by gobbling up the smaller banks. That should ensure that the American taxpayer will always have to bail them out. Cause if they were too big to fail before the bailout and the stress tests, wait until you see how big they'll be in the future.

[Igel]

6. Call me cynical.

It's been that kind of day.

But this might well cause the government to tell them to take TARP money. Geithner already has some leverage over the larger national banks, and converting the preferred shares of stocks to common stock, as it's rumored he/they want(s) to do, would grant even control, not just leverage. Putting regional banks in a position of having to accept federal money would give him (them) leverage over regional banks, as well.