RTTNews - The Congressional Oversight Panel issued a report Tuesday offering its approval of the stress tests and suggesting that continuing the tests might be warranted as long as banks continue to need additional capital and the economy continues to struggle. However, they also advised against overuse of or too much reliance on the tests.
While no one should gainsay the potentially positive results of the tests, the report said, it would be equally unwise to think that those results reflect a diagnosis of all of the potential weaknesses or create a necessarily sufficient buffer against future reverses for the banking system.
Members of the panel warned lawmakers that the spike in unemployment in May, up to 9.4 percent, is worse than the most adverse case scenario and could warrant another round of testing.
The 25-year high rate of unemployment has already exceeded the harshest scenario considered so far, suggesting that the stress tests should be repeated, the report said. The most adverse scenario for 2009 had unemployment rising to 8.9 percent.
The baseline forecast predicted a GDP showing a 2 percent contraction in 2009 and 2.1 percent growth in 2010. Unemployment in the consensus forecast averages 9.8 percent between 2009 and 2010.
In the worst-case scenario, GDP is projected at negative 3.3 percent in 2009 and a meager growth rate of 0.5 percent in 2010. Unemployment rises over 10 percent in the adverse scenario.
There is a correlation between the rate of default on bank loans and the unemployment rate. Some analysts are concerned that the rising rate of unemployment could trigger another wave of defaults on mortgages, car loans, and credit cards, further dragging on the economy as it struggles to recover.
The stress test results, released in May, revealed that 10 of the 19 major bank holding companies that underwent the rigorous test collectively needed to raise nearly $75 billion. The banks were required to raise the capital by November, with Bank of America (BAC) leading the way with nearly $34 billion.
Despite the need for nearly $78 billion in capital, Federal Reserve Chairman Ben Bernanke was pleased with the results.
The examiners found that nearly all the banks that were evaluated have enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical adverse scenario, he noted.
The panel also reported on the Treasury Department's controversial $700 billion Troubled Asset Relief Program, or TARP. In its report, the panel called for additional transparency for the stress tests.
Transparency will also be critical as financial institutions seek to repay their TARP loans, both to assess the strength of these institutions and to assure that the process by which these loans are repaid is fair, the report said.
The information being requested by the panel about the stress tests includes some additional details about the methodology of the tests.
Although the reviews were called conservative and reasonable, the panel still harbors some serious concerns about the murkiness surrounding the criteria used to assess the banks.
The Federal Reserve Board should be commended for releasing an unprecedented amount of bank supervisory information, but additional transparency would be helpful both to assess the strength of the banks and to restore confidence in the banking system, the panel wrote.
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