Will The Fed Use Stress Tests To Determine If A Bank Needs Capital?

Washington, DC (PressExposure) February 25, 2009 -- The head of the Federal Reserve System, Ben S. Bernanke told lawmakers at a 'Senate Banking Committee' hearing yesterday that he strongly rejects the suggestion that officials could use the reviews of a bank's balance sheet as a pretext for government takeovers of the nation's largest lenders.

"I don't see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn't necessary. The Treasury will buy convertible preferred stock in the nineteen largest U.S. banks if stress tests determine they need more capital to weather a deeper than forecast recession. The shares would be converted to common equity stakes only as extraordinary losses materialize. How much more we'll have to do depends on the state of the banks, it depends on how the economy evolves and it depends on the margin of safety we think we want to have".

In answer to a question from Senator Bob Corker, a Tennessee Republican, Bernanke replied that, "the so called stress tests will look at the balance sheets and the capital needs of each of our nineteen largest $100-billion-dollar-plus banks over the next two-year horizon".

The Standard & Poor's 500 Banks Index climbed 14.8 percent following Bernanke's comments suggesting that his remarks had somewhat calmed very concerned investors who had feared that the Treasury's capital-injection was a forerunner to nationalization and Marshall Front, who oversees a $500 million fund as chief executive officer of 'Front Barnett Associates' in Chicago said, "There's a bit of relief that that's not going to happen. Today at least there seems to be a growing sense of relief that nationalization was de-emphasized and put into perspective".

Whereas investors might feel a little reassured by the Fed's intended action, a private survey that was released yesterday indicated that confidence among U.S. consumers fell to 25 this month making it a record low since 1967.

Reacting to ongoing criticism that characterize the major U.S. banks as zombie firms that are only kept alive by federal programs, Bernanke responded that, "They have substantial franchise value".

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Press Release Submitted On: February 25, 2009 at 12:24 am
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