President Obama Reveals Details of the Bank Stress Test
Wednesday, February 25, 2009SUSIE GHARIB: The Obama administration unveiled today its stress test guidelines for American banks. They'll be used to test the health of the nation's 19 biggest financial institutions to determine if they need more government loans and how much. It comes as President Obama urges lawmakers to write tough new regulations for the financial industry. Darren Gersh has details.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: This afternoon the president laid out financial ground rules for the future, putting forward his broad principles for reform once the credit crisis is over.
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Financial institutions that pose serious risks, systemic risks to our market should be subject to serious oversight by the government.
GERSH: That's for tomorrow. For today, regulators are beginning to stress test bank finances and now they have said how it will work. Bank examiners will evaluate the ability of consumers and businesses to repay loans under two scenarios. First, the baseline assumes the economy falls 2 percent this year and rebounds 2 percent next year; unemployment hovers between 8 and 9 percent. Second, in what is delicately called the more adverse case, the economy drops more than 3 percent and is mostly flat next year; unemployment tops 10 percent. Regulators will also examine what happens to banks if home prices keep sliding, under the baseline, down 14 percent this year and 4 percent next, in the worst case, a sobering 22 percent this year and 7 percent next year. Experts consider the assumptions plausible. The question says Vince Reinhart, a former senior official at the Federal Reserve, is with the banks.
VINCENT REINHART, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: We're not really confident that banks know what their own balance sheet is. So it is not obvious that we should be confident that they would know what their balance sheet would look like in a year.
GERSH: Regulators said they would not make the results public, leaving individual banks to release their test scores. The real goal of this exercise, Reinhart says, is for regulators to force banks to clean up their finances.
REINHART: This is saying, take a look at your balance sheet, report back if you think you have balance sheet problems. This is an opportunity for them to say, well, actually we need a little more capital.
GERSH: But even as the government contemplates pumping more money into banks, Fed Chairman Ben Bernanke repeated assurances to the House Financial Services Committee today that the stress tests won't end with the government owning banks.
BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: Nationalization to my mind, is when the government seizes the bank, zeroes out the shareholders and begins to manage and run the bank. And we don't plan anything like that.
GERSH: Bernanke also took a rare stab at analyzing the stock market. The Fed chairman said the low prices today don't reflect economic fundamentals as much as the fear investors now feel. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
