johnnymk

http://www.charlotteobserver.com/408/story/635205.html

By Christina Rexrode
crexrode@charlotteobserver.com
Posted: Wednesday, Apr. 01, 2009

A top banking regulator indicated Tuesday that some results of the much-discussed bank stress tests will be made public, and analysts and some lawmakers are calling for broad disclosure.

The examinations, which are mandatory for the country's largest banks, should be completed sometime this month. The government is praising the tests as a way to restore public confidence in the banking system.

John Dugan, the U.S. comptroller of the currency, told reporters after a speech in Washington that he's sure some information about the stress tests will be released, but he wasn't specific.

U.S. Rep. Brad Miller, an N.C. Democrat who serves on the House Financial Services Committee, said he hasn't been told whether the stress-test results will be released publicly. But Miller said it will be hard to trust them otherwise.

“We can't just hear that there was a stress test based upon criteria that's secret with results that are secret and have Treasury announce, ‘Everything's fine,'” Miller said. “There has to be disclosure that reassures the public that it was real and that it was tough-minded and that it meant something.”

Several bank analysts agree. “We believe that the confidential and ambiguous nature of the stress tests will be viewed negatively, as it clearly allows leeway from regulators and obscures comparability between institutions,” analysts at RBC Capital Markets wrote.

Analysts also note that the public is already wary of the government's attempts to fix the banking industry. The latest blow came Thursday, when the head of the Office of Thrift Supervision was removed over allegations that he allowed some troubled banks to overstate their capital levels.

Others say the Treasury is only delaying the inevitable if it doesn't reveal the stress-test results, since the public will eventually be able to figure them out. That's because the Treasury is required to release the names of the banks that receive stress-test money, and it appears that only the banks that “fail” the test will get the money.

But Dick Bove, an analyst at Rochdale Securities, said publishing the test results would be counterproductive, since it could create a run on deposits at the low-scoring banks. That's the last thing the government wants, Bove said, since that could force it to step in and take over those banks – and perhaps ask Congress for more money for the bank bailout.

Ken Thomas, a Miami-based banking consultant and economist, also said that publishing the results could create unnecessary panic.

“If a bank is going to go over the edge, let it go over the edge itself,” Thomas said, noting how regulators partially blamed comments by Sen. Charles Schumer for IndyMac Bancorp's failure last summer.

U.S. Rep. Mel Watt, a Charlotte Democrat who also serves on the House Financial Services Committee, said he does not expect the stress-test results to be released to legislators, either.

“I'm glad to see they're doing the stress tests,” Watt said. “But I'm not anticipating micro-managing them.”

Banks already undergo regular stress tests to determine how they'd fare in a deteriorating economy, but the Treasury has rolled out the new, extra round of stress testing as one of its latest attempts to try to fix the battered banking industry.

The country's 19 largest bank holding companies, including Bank of America Corp. and Wells Fargo & Co., are being required to undergo the extra stress tests right now, though the Treasury hasn't clarified how these differ from the normal testing. Ken Lewis, chief executive of Charlotte's Bank of America, has said he's confident his company will pass the test.

Once the results are in, the government will essentially force the banks that “fail” to accept government money with lots of strings attached, after first giving them a chance to raise capital on the private market. The Treasury is overseeing the stress tests along with other financial regulators, including the Office of the Comptroller of the Currency and the Federal Reserve.

When the agencies announced the stress tests in February, they didn't mention whether the results would be made public. They said the tests would increase confidence in banks not because of greater transparency but because investors, creditors and counterparties would be assured that banks have sufficient capital. (They did mention they would work to increase public information about exposures on banks' balance sheets.)

And though they must release the names of the banks that receive money, they don't have to release the names of all the applicants.

Regulators already have a tradition of keeping some communications with their banks confidential, partly for the sake of encouraging the banks to be candid. For example, the Federal Deposit Insurance Corp. does not reveal the names of the banks on its “problem list,” and the Federal Reserve does not disclose which banks it surveyed for its quarterly loan report.

Some analysts have found other points to criticize beyond transparency. They criticize how the government's plan allows the banks themselves to conduct the tests, which they then report to the regulators. The Treasury hasn't publicly set specific goals for capitalization levels. And the analysts question whether the tests are tough enough.

For example, the examinations set 8.9 percent unemployment in 2009 as the “more adverse” economic scenario. But in North Carolina, the unemployment rate is already 10.7 percent. (It's 8.1 percent nationally.)

“Unemployment (in the test) should be 12 to 15 percent,” said Thomas, the Miami bank consultant. “Which no one's really predicting, but that's what stress is.”

Thomas also questions the efficacy of stress tests overall.

“Is 10 percent unemployment going to make a guy not pay his loan back?” Thomas said. “We don't know that. It's just a lot of assumptions.”