The federal government released details of its "stress test" for major banks Wednesday, saying they must be strong enough to weather a worse-than-expected economic scenario including a 22% drop in home prices this year and unemployment topping 10% next year.
As part of its revamped plan to restore confidence in the financial system and eventually restart lending, the Obama administration said big banks judged too weak to cope with losses on toxic securities and other assets would get six months to raise fresh capital from private investors.
If they couldn't raise that capital, the Treasury Department would force them to take more government money. Either way, the banks would remain strong enough that customers and investors wouldn't have to worry about their survival, senior administration officials said.
An index of bank stocks, which slumped after Treasury Secretary Timothy F. Geithner outlined the stress-test and capital-infusion plans two weeks ago, rallied on the release of the details and the possibility that the test might be less burdensome than banks and Wall Street had feared.
The BKX index of 24 bank stocks rose 2.4% after surging 13% on Monday. That helped broader indexes hold on to much of their gains of the day before. The Standard & Poor's 500 index slipped 1.1% after jumping 4% on Monday.
The stock market also was encouraged for a second day by Federal Reserve Chairman Ben S. Bernanke, who reiterated before a congressional panel that officials didn't plan a full-scale nationalization of banks that would wipe out shareholders' stakes even if the government wound up with "substantial" holdings in ailing Citigroup Inc. and other banks.
Banks received $250 billion in the first round of the $700-billion financial rescue program. Officials on Wednesday said it was too early to speculate how much additional taxpayer funding might be needed for the latest phase. Regulators will work with the banks' own risk experts to assess how the institutions would fare under a "baseline" scenario, an average of projections by mainstream economists, as well as worse-than-expected conditions.
The baseline scenario calls for gross domestic product -- a measure of the economy's total output -- to fall 2% this year, while the adverse scenario envisions a 3.3% downturn. For all of 2008, GDP grew 1.3%. That included a 3.8% annualized rate of decline in the last three months of the year, representing the economy's most severe contraction since 1982.
