Transcripts

Which Banks Made The Grade With The Government

SUSIE GHARIB: The scores are out. The nation's biggest banks found out today whether they passed or failed the government's stress tests. But the American public won't get the official results until May 4. Meanwhile, regulators released a 21-page document detailing the guidelines they followed in conducting the tests and how the process measured the health of 19 financial institutions. Washington bureau chief Darren Gersh reports.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: While big banks got their grades today, regulators gave the rest of the world a sort of study guide for the stress test. The document provides some detail about how the banks were evaluated. Standard & Poor's Mike Thompson says that was enough to provide reassurance about the process.

MICHAEL THOMPSON, MANAGING DIR., STANDARD & POOR'S: It's very credible and I think that -- if all the information is correct and accurate and been verified, I think the marketplace will probably take it at face value and I think it's very credible.

GERSH: Regulators stressed the nation's 19 largest banks are all now well capitalized, though some might need to raise more money to weather a deeper recession. Under the stress test, regulators say they are examining everything from bank trading positions to loan portfolios. It's a detailed look at the books, showing everything from credit cards and mortgages to commercial loans, including credit scores and the geographic distribution of borrowers. The next step is to test loan performance in an economy where growth is flat next year and unemployment tops 10 percent. Banks that don't have the resources to withstand that economy will be required to beef up their capital. Regulators did not disclose how big that capital buffer should be or the assumptions they are making about loan losses. Banking experts like Gerard Cassidy say that's critical.

VOICE OF GERARD CASSIDY, MANAGING DIRECTOR, RBC CAPITAL MARKETS: If it comes out that they think the home equity loan losses over a two-year period will be 3 percent, people will say, you know, though the mechanics and the methodology were accurate, the number you're using on losses is too easy -- too light. So the test is really a failure.

GERSH: Regulators are not stress testing the books using current market prices for so- called toxic assets. And former Federal Reserve senior staffer Vince Reinhart says that's better for banks.

VINCE REINHART, SR. FELLOW, AEI: They are not asking banks to say, oh, the markets mark down the value of those assets a lot, how much are they worth in the market today? They're saying just how much income and loss will generate from you holding these loans.

GERSH: More details about how much money banks need to raise is expected the week of May 4. By then, we may no longer be calling this a stress test. The tough economic assumptions regulators made when they started this process months ago now look a lot like the consensus forecast. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.