The US Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests of 19 US banks, with some officials concerned at potential damage to weaker institutions.
With a May 4 deadline approaching, there was no set plan for how much information to release, how to categorise the results or who should make the announcements, people familiar with the matter said. While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicised, the Treasury is pushing for broader disclosure.
The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.
“There are plenty of ways to go wrong here,” said Wayne Abernathy, executive vice-president of the American Bankers Association in Washington. “It might have sounded good at the time, but now looking back, it has far more risk than benefit.” The banks haven’t been consulted on how the information would be released and have raised the issue with the Treasury, three industry officials said on condition of anonymity.
Two-year horizon
The 19 firms include Citigroup Inc, Bank of America Corp, JPMorgan Chase & Co, Goldman Sachs Group Inc, GMAC LLC and MetLife Inc and other commercial, trust and regional banks. The Federal Reserve, OCC, Federal Deposit Insurance Corp and Office of Thrift Supervision are using the tests to determine whether the 19 have enough capital to cover losses over the next two years should the economic downturn worsen.
Fed officials have pushed for the release of a white paper laying out the methodology of the assessments in an effort to bolster their credibility. The central bank has been leery of inserting politics into the examination process, two people familiar with the matter said.
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A statement on the methods is scheduled for release on April 24. The Fed, the nation’s primary regulator of bank holding companies, is leading the tests. The 19 companies might get preliminary results as soon as April 24, a person briefed on the matter said. Regulators, all of which regularly administer exams to the lenders they oversee, have privately expressed concern about the tests and whether they would be effective, the two people said.
Six minutes
While weaker banks deemed to need additional capital would be given six months to raise it, financial markets might have a little more than six minutes of patience before punishing them if the information was publicly released, one official said.
Geithner has said he crafted the stress test programme in an effort to provide more transparency about the health of banks’ balance sheets. He and Fed Chairman Ben S Bernanke have also noted that most of the 19 banks were currently well capitalised and that not all of them would need new capital.
There have been signs this year of some recovery in the banking industry. Goldman Sachs said on April 13 that its earnings for the first quarter were $1.81 billion, or $3.39 a share, after a surge in trading revenue.
The results were better than analysts’ expectations of $1.64 and the New York-based firm sold $5 billion in stock to help repay government capital injections.
Earlier this month, Wells Fargo & Co said it would report net income of $3 billion, 50 per cent more than the previous year’s period. The San Francisco-based bank said it closed $100 billion of mortgages in the quarter with an equal amount waiting to be finished, a signal that business was picking up.
Bank earnings
JPMorgan reported profit that beat analysts’ estimates on April 16, with first-quarter earnings of $2.14 billion, or 40 cents a share. CEO Jamie Dimon labeled the TARP programme a “scarlet letter” and said the firm could repay the government “tomorrow.”
Still, not all banks are expected to be healthy enough to forgo the Treasury’s assistance, which along with additional capital injections could include converting previous government investments from preferred shares to common equity.
How the market handles the results was a chief worry of banks and regulators, said Scott Talbott, chief lobbyist for the Financial Services Roundtable in Washington. “The problem is you pick winners and losers,” Talbott said.
Banking lawyers and industry officials said that the Treasury needed to be very clear with the public about the reviews, which by their design test events that might not happen. Because of the intense interest from the media and investors, the government was required to “explain early and often” the purpose of the programme, said ABA’s Abernathy.
“It’s very possible that we are seeing the turning of the corner for the banking industry,” he said. “Our biggest fear is that it becomes a confidence-eroding episode at just the wrong time.”