Federal officials privately issue banks' 'stress tests' results

More than 150 senior bank examiners, economists and other officials from three federal bank regulatory agencies spent the last several weeks scouring the books of the 19 U.S. banks with more than $100 billion in assets, including JPMorgan Chase, Citigroup, Bank of America and Wells Fargo. The banks combined hold two-thirds of the assets of the entire U.S. banking system and more than half of the loans.

The stress tests are designed to determine if the banks need to raise more money as a cushion against losses on loans and other investments. If so, they would be given six months to raise it privately before the federal government would step in with additional bailout money to ensure that they would not fail. So far, the 19 banks have gotten about $214 billion in bailout money from the $700-billion rescue fund, and the stress tests could determine if the administration needs to ask Congress to replenish the fund.

Regulators analyzed each bank's reserves and its possible losses under two scenarios.

The first was based on the consensus of various professional forecasters for economic conditions through the end of 2010. They include the nation's economic output dropping by 2% this year before rebounding to produce 2.1% growth in 2010, housing prices falling 14% this year and an additional 4% next year and the unemployment rate averaging 8.8% next year.

The second scenario was designed to be a "worse case" that would include "market shocks" similar to what took place in the second half of last year, according to the Fed. The scenario assumes economic output dropping 3.3% this year before rebounding weakly to 0.5% growth in 2010. It assumes that housing prices will plummet 22% this year and a further 7% next year, and that unemployment will average 8.9% this year and 10.3% in 2010. Unemployment in March was 8.5%.

Economist Mark Zandi of Moody's Economy.com said the scenarios, developed in February, aren't particularly tough.

"If they really wanted to put them under a stress, they'd use more negative assumptions," Zandi said. He noted that the first scenario was more optimistic than his projections, and that the worse-case scenario was only slightly worse.

But the Federal Reserve said the adverse scenario was not designed to be the worst possible case, just one that is "severe, but plausible."

The senior Fed official said regulators and administration officials were still trying to determine how much information from the stress tests to release.

Results of bank regulatory exams normally aren't publicly released to avoid runs on the banks by depositors and a lack of confidence by investors. But the administration has emphasized the importance of the stress tests, and failure to release enough data could lead to doubts about how well the banks performed.

--

jim.puzzanghera@latimes.com

Michael Oneal of the Chicago Tribune contributed to this report.