Stressed Out?

The Treasury Department is working to complete stress tests on 19 top U.S. banks. Reports are circulating that all the banks will receive a passing grade, but there is going to be some differentiation in the results between those that are particularly strong and those that are not. Several media outlets today are citing "senior Administration officials" as saying Treasury plans to release—or to encourage the banks to release—the results of the stress tests. The purpose for this, according to these officials, is to prevent rumors about "weak" institutions from causing investors, creditors, borrowers, and depositors to lose confidence in certain institutions. The release of the results will not occur before the end of the "earnings season"— April 24.

It does appear to us that the stress test results will be a contributing factor to a sorting of the banking industry into the healthy and the less healthy—to look at it in the most charitable light. Some banks are contributing to that sorting process by touting early their first quarter results and by openly discussing paying back the TARP funding they have received.

So faced with this developing story, we here at Financial Reform Watch have some questions we are pondering:

  • Will Treasury actually sort the banks into categories of strength?
  • What information will Treasury release and what information will the banks release?
  • Will the markets react as Treasury hopes to the release of information, or will they focus only on the less good results as a reason to drive down the values of certain institutions' stocks?

If this sorting process develops through the spring and the summer, talk of consolidation in the industry is likely to increase. So that supposition leads to questions as to whether or not Secretary Geithner will become an advocate for consolidation as Secretary Paulson before him did in suggesting through the capital injection process that certain banks—usually smaller ones—should be taken over by others.

In any case, the release of stress test results and information compiled in conducting the test could just as easily roil the markets as calm them in our view.

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