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‘Stress Tests’ Put Credibility of Banks, Regulators Back in Spotlight

On the day the government released better-than-expected stress test results for 19 major banks, a panel of economic analysts explain how the numbers were calculated and gauge the report's impact on the nation's financial health.

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  • JUDY WOODRUFF:

    First, the stress tests on the banks. We begin with more from Charlie Rose's interview with Treasury Secretary Timothy Geithner. He was asked about the purpose of the tests and what the government hopes to achieve.

  • TIMOTHY GEITHNER, Treasury Secretary:

    This financial system at the beginning of this year was operating under a deep cloud of uncertainty, great loss of confidence. People were very worried about whether the scale of losses that might come in a deeper recession would be sustainable for this system.

    And banks were unable to raise equity, could not borrow without guarantees from the government, and they were being defensive. They were pulling back on lending. And that was sucking oxygen out of recovery, deepening the recession. And that's — fundamentally underpinning that was a sense of concern, lack of confidence, again, about how strong banks were.

    So what we did with the Fed is, for the first time ever, we brought the nation's financial supervisors together and, in an unprecedented step, asked them to do a careful look under the hood, to take a careful look at how much — how strong these institutions were in the event things got worse.

    And what these results will do is they will bring in a level of transparency to bank balance sheets that'll allow investors to judge, make it easier for them to raise capital, improve confidence that this system is going to be strong enough to get through this, and that will be enormously helpful.

    It will be an important next step forward. Again, because of the virtues of bringing disclosure and transparency, it will help lift this fog of uncertainty over the financial system, and I think the results will be on balance reassuring.

  • CHARLIE ROSE, PBS Host:

    Two things. One, transparency was necessary so that people would have confidence in the numbers that you release?

  • TIMOTHY GEITHNER:

    That's right. They get to judge. They'll get to see them. They'll make their own judgments. But you're going to hear criticism from both sides on this, Charlie. A lot of people will say these were unfairly tough.

  • CHARLIE ROSE:

    And the other side, they were not tough enough?

  • TIM GEITHNER:

    And there will be other people who say that, you know, that losses could be worse. And they may be right. But this was designed — again, designed by the Fed — to get the balance right and to strike the right balance.

    And it is a very exacting set of standards. Again, because what we want to do is to make sure that people have confidence that our financial system is going to be able to get through this and going to be able to lend. And to be able to lend, they need to be able to raise equity and have a stronger cushion against future loss.

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