Regulators Say Banks Holding Up in Stress Tests, But May Need to Raise More Funds

April 9, 2009 11:50 AM EDT

According to reports out of the NY Times this morning, regulators have indicated that while the banking "stress tests" are holding up so far, many financial institutions may need to raise more capital.

Following eight weeks of rigorous evaluations on the U.S.'s top 19 banks, federal examiners have said that they expect each institution to pass the stress tests. In the event that a bank needs "exceptional assistance", however, the Fed's have said that taxpayer money will be provided after a 6 month grace period. The NY Times article points out that in the event of extreme cases, the government may be forced to take a larger, possibly controlling stake in an institution. Regulators expect to finish their bank stress tests by the end of this month.

As far as the stress tests go, the government's aim is to force certain banks to sell troubled assets, essentially shoring up encumbered balance sheets with the hope that private investments will begin to flow into the company.

To see the details of the criterion being used in the government's stress test scenarios -- GDP, unemployment and housing prices -- view our report Fed's Bank Stress Test Doesn't Account for "Black Swan".

These stress tests are receiving widespread scrutiny from retail investors and top regulators alike. On March 26, the Richmond Fed's President, Jeffrey Lacker, made some comments saying the stress tests may need to be modified. And just yesterday, the FDIC's Shelia Bair suggested that these tests are "pointless".

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