Bank stress tests should be repeated if the U.S. unemployment rate rises beyond levels assumed by regulators in a recent round of examinations that provided relief to markets, according to a report released by a bailout watchdog panel on Tuesday.
The Congressional Oversight Panel said in the report that the stress tests should also be repeated periodically as long as banks continue to hold appreciable amounts of toxic assets.
The monthly report from the panel, led by Harvard Law School Professor Elizabeth Warren, said the stress tests, ordered by the U.S. Treasury Department for the top 19 U.S. bank holding companies, used a risk-modeling approach that on the whole was reasonable and conservative.
But the panel noted that it is impossible for an outside party to replicate the loss projections that form the core of the tests.
It noted, however, that the more adverse scenario assumption for the U.S. unemployment rate in the tests for the has nearly been met so far in 2009. The May unemployment rate of 9.4 percent pushed the average for the year to 8.5 percent, not far from the 8.9 percent assumed.
We recommend that Treasury publicly track the status of its stress test macro-economic assumptions (unemployment, GDP, and housing prices) and repeat the stress test if the adverse scenario assumptions have been exceeded, the panel said.
The stress test results on May 7 caused many investors to breathe a sigh of relief when regulators ordered 10 of the top 19 U.S. banks to raise nearly $75 billion in new capital, far less than feared. Since then, the tested banks as a group have executed or announced share sales totaling about $65 billion.
The report also comes as the Treasury is preparing to announce which of these banks will be allowed to repay billions of dollars in emergency government capital injections received last fall.
Nine of the 19 banks, which each have assets exceeding $100 billion in assets, have met key conditions set by the Federal Reserve for repayment, including selling new shares, issuing debt without a government guarantee, and resolving capital deficiencies identified by the stress tests. The nine banks have received $66.7 billion in government capital.
The Wall Street Journal earlier reported that nine banks will be allowed to repay more than $50 billion in taxpayer funds. Bloomberg reported that 10 banks will be allowed to repay. The Treasury did not respond to queries about the stories, which cited unnamed people familiar with the matter.
The oversight panel's report acknowledged that the stress tests had a positive effect on market confidence, but it cautioned against assigning too much value to them.
They do not model bank holding company, or BHC, performance under worst case scenarios, and as a result they do not project the capital necessary to prevent banks from being stressed to near the breaking point,
(Editing by Jan Dahinten)