/ 16 April 2009

‘Stress tests’ to show health of US banking sector

Details on stress tests measuring how well US banks will weather difficult economic conditions are to be disclosed to promote investor confidence.

The US government plans to disclose information on the financial health of the country’s 19 biggest banks in an effort to restore confidence in the financial system.

The New York Times reported on Thursday that the Obama administration has decided to reveal details of the financial stress tests being conducted to avoid damaging rumours about those banks thought to be weakest.

All of the financial institutions are expected to pass the tests, but some will do better than others. The stress tests are designed to measure how well the banks will weather difficult economic conditions over the next two years.

The Treasury Department faces a delicate balancing act, as revealing too much about weaker banks could also unsettle investors. So far, the Treasury has said that it will disclose any new capital injections into troubled banks. Officials are still trying to work out how much further information they want to publish.

‘Aim is to prevent panic’
Goldman Sachs may have forced the administration’s hand when it sold $5-billion of stock yesterday. It plans to use the proceeds and other capital to repay the $10-billion in emergency bailout money it received in October. It is the first major institution to pay back money from the troubled asset relief programme.

The Goldman move appeared to signal to the markets the investment bank’s confidence that it would pass its stress test with flying colours. It has put pressure on other financial institutions to do the same or risk being judged in worse health by investors.

The government now worries that details on stronger banks could leak out from the stress tests, leaving weaker firms vulnerable to damaging speculation.

“The purpose of this programme is to prevent panic, not cause it,” a senior official involved in the stress tests told the New York Times. “And it’s becoming clearer that we and the banks are going to have to explain clearly where each bank falls in the spectrum.” — Guardian News and Media 2009