Banks' stress test results to be revealed

WASHINGTON — The Obama administration and the Federal Reserve have pushed back until May 7 the release of much-anticipated results on how the nation's 19 biggest banks performed under so-called stress tests.

The tests are designed to gauge how the banks' finances would hold up in an even tougher economic environment than the current dismal downturn. Results were expected Monday but were pushed back to give banks more time to argue their case that they shouldn't be forced to raise more capital.

"The government expects to announce information from the stress assessment exercise late Thursday afternoon," said a government source, who demanded anonymity because he was not authorized to speak publicly on the matter.

Since mid-February, the 19 banks with assets above $100 billion were subjected to an unprecedented evaluation that looked at the hypothetical performance of their loans and investments in an environment where the economy contracted 3.3 percent, unemployment shot up to 10.3 percent and credit card losses mounted to 20 percent.

If big losses were projected for a bank, it would be given six months to raise additional capital to buffer against those hypothetical losses.

The anticipated results are important because they'll give both investors and depositors a better sense about the strength of a particular bank's loan and investment portfolio.

The exercise, however, is fraught with risk.

The Obama administration wants to provide Americans enough information to draw reasonable conclusions about a bank's health but not so much information that it sparks a bank run.

"If they don't provide information that suggests differentiation across institutions, then the credibility of the exercise will be called into question," said Vincent Reinhart, a former top economist at the Fed. "But if you release too much information ... you have the possibility of a funding problem that puts an institution at risk — very tough line to walk."

If a bank can't raise enough capital in the private sector for the government-mandated buffer, pre-existing government loans to the banks could be converted into a special class of stock that would give U.S. taxpayers an ownership stake in the company. That frees up banks from having to pay the federal government the 5 percent interest rate on the taxpayer bailout.