Emerging details of the Obama administration's revamping of the government's financial-system rescue reveal that the Treasury Department intends to operate two distinct programs to infuse capital into the nation's banks.
One will seek to ensure the survival of the biggest banks so that they may at some point return to something like business as usual. These institutions, which number fewer than 20, will undergo a mandatory "stress test" to see if they can withstand a "worst-case" scenario: an economic crisis lasting two more years.
If the exam indicates one of these big banks is in bad shape, it will have to take on new capital -- from private investors if available or, if not, from the government.
The second program will include about 8,300 smaller banks, relatively few of which had anything to do with exotic mortgages or the toxic securities backed by them.
These banks, not considered too big to fail, probably will get a less extensive review, Treasury officials say, and will receive capital not if they are in bad shape but only if they are strong enough that they probably don't need the investment.
Indeed, the government is looking at this group of banks, each with assets of less than $100 billion, as being more likely to increase lending.
"To run a stress test on all of them would take an awful long time, and a lot of the smaller banks are in better shape," said a senior administration official. "At many of them, if you give them fresh capital they'll turn around and start making new loans."
The Treasury Department began investing in banks last October under the $700-billion Troubled Asset Relief Program to stabilize the financial industry and promote economic recovery.
Its second phase was outlined Tuesday by Treasury Secretary Timothy F. Geithner, who provided few details. Officials later said they were still working on the specifics of the plan.
Filling in some gaps, Treasury spokesman Isaac Baker said smaller banks probably would be screened in a process similar to that used in the first phase of TARP. That began with reviews by front-line regulators, who then made recommendations on whether funding should be approved to one committee of top Treasury officials and another made up of senior members of the four bank regulatory agencies.
The regulatory reviews focused on the confidential safety and soundness rankings that regulators give to banks. They also looked at bank strength indicators, known as performance ratios, which gauge factors including bad loans and reserves.
