Tulsa World: Bank tests miss their mark

MAKE US YOUR HOMEPAGE | Sunday, November 22, 2009 | WIRELESS

Home > Business

Newspaper View Print this story

Comment

RSS

Bookmark

Bank tests miss their mark
Capital needs were based on unrealistic economic projections.

A GMAC sign is shown at a GM/Chrysler dealership in Oakland, Calif. The Federal Reserve says GMAC is the only one of 19 stress-tested banks that needs more capital to withstand a future downturn. Associated Press file photo

By DANIEL WAGNER & STEPHEN MANNING Associated Press
Published: 11/10/2009 2:26 AM
Last Modified: 11/10/2009 8:52 AM

WASHINGTON — All but one of the 19 largest banks have raised the extra capital cushion regulators said they'd need to withstand a deeper recession — a sign, the Treasury secretary said, of how much the financial system has improved since the crisis began.

But the banks' capital needs were based on unrealistic economic projections. Some have proved too rosy, others too grim.

For example, the test envisioned unemployment reaching 8.9 percent this year; it stands at 10.2 percent.

On the other hand, the tests assumed housing prices would fall 22 percent this year in a worst-case scenario. Instead, they fell 5.5 percent in the first half of the year and have risen for the past three months.

Earlier this year, the Obama administration subjected the 19 largest banks to "stress tests." The goal was to boost confidence in the financial sector by showing how strong banks' balance sheets were. Regulators used a series of economic projections to see if banks could withstand the losses they would suffer in case of a deeper-than-expected recession.

But the recession diverged far from the economic projections used. Analysts say their results reveal little about what troubles the banks now face.

Though conditions have improved since the depths of the credit crisis, some analysts say certain banks face problems the stress-test buffers may not solve.

"We're already at record numbers on losses, and those numbers are rising," said Christopher Whalen, managing director

of Institutional Risk Analytics.

The test results in May found that 10 of the 19 largest banks needed more capital to withstand losses they would suffer if the recession worsened.

They were given six months to raise a total of $74.6 billion of capital. The Federal Reserve said Monday that they have raised a total of $77 billion.

Whalen said that if the banks approach the loss rates the stress tests envisioned, they still might not have enough capital to stay afloat.

The only bank that failed to raise the required capital was GMAC, which is weighed down by bad mortgage loans but provides financing to auto dealers and buyers.

Regulators had said GMAC needed to raise an additional $11.5 billion.

The company is in talks with the Treasury Department about getting a fresh bailout from the $700 billion financial rescue fund. It is unclear how much money it will require. But Secretary Timothy Geithner said it "is expected to be lower than anticipated" when the stress test results were announced.

GMAC already has received $12.5 billion of taxpayer money. The Detroit-based lender is in "active dialogue" with Treasury about its next round of bailout money, said spokeswoman Gina Proia. Those funds will be used to fulfill the stress test requirement "and not to resolve any new matter related to our business," she added.

GMAC provides wholesale financing to many General Motors and Chrysler dealerships to pay for the vehicles on their lots. The company also operates a mortgage lending unit — Residential Capital — which has been pummeled by the housing market downturn. It runs an insurance unit and an online banking unit called Ally Bank.

Geithner said the success of the other 18 companies showed that the financial sector has become far more stable since January. By DANIEL WAGNER & STEPHEN MANNING Associated Press

Newspaper View Print this story

Comment

RSS

Bookmark

Reader Comments

Show: Most Recent Comment First

Add your comment

0 comments have been made on this story so far. Tell us what you think below!

Reporting Comments

If you see a comment that violates our terms and conditions, please help us by clicking the "Report this Comment" link next to a comment. That will alert the web staff to review the comment. Thank you. -- Web Editor Jason Collington

Add Your Comment
In order to post a comment on this article, you must sign in to Tulsaworld.com. If you do not have a site account, you can create an account for free.