SCENARIOS: After stress tests, what next for U.S. banks?
WASHINGTON (Reuters) - U.S. regulators and the nation's largest banks have nearly completed "stress tests" to determine how well the lenders could fare if the economy were to follow a thornier path than expected.
Citigroup Inc, Wells Fargo & Co and Bank of America are among the 19 lenders under scrutiny who may get government help strengthening their balance sheets following the conclusion of the tests this month.
Below is the sequence of steps, mandated by the government, that are meant to restore the banks to health:
COMPLETE THE STRESS TEST
Regulators are putting banks through a dry run of how they would perform should the U.S. recession prove deeper and longer than expected. Officials will use the findings, which are due at the end of April, to determine which banks may need more capital. Officials will take care that the test results do not damage the banks' reputations, but they are expected to give some stark orders on how the banks should rebuild.
SELL ASSETS INTO A GOVERNMENT FUND
Banks will be encouraged to sell failing investments under a new public-private investment program the U.S. Treasury Department hopes to have up and running by the end of May. If banks were to unload these hard-to-price assets, it should be easier for them to attract fresh private capital.
RAISE CAPITAL IN THE PRIVATE MARKETS
Officials may also order banks found to be undercapitalized to raise new funds. By selling stock, banks will add ballast to their balance sheet. A troubled bank will have six months to fill any capital hole as defined by regulators.
RAISE CAPITAL THROUGH GOVERNMENT INVESTMENTS
Undercapitalized banks would have the option of turning to the government for investment immediately or later if they have trouble raising private capital. Washington's previous bank investments have come with strings attached, like limits on executive pay. The tough terms are expected to encourage firms to work hard to find private investors.
MORE EXTREME MEASURES; NO 'NATIONALIZATION'
If a bank was in desperate need of capital and in danger of failing, officials could take other extreme measures. With the memory of Lehman Brothers' failure last year fresh in their minds, top officials have said they will not let any systemically important firm fail. The Obama administration has asked Congress to quickly give the government the ability to take control of large, interconnected financial firms to wind them down. The administration's proposed legislation would also give the Federal Deposit Insurance Corp the power to make loans to a troubled firm while keeping it open, buy a stake in the firm, assume obligations, take a lien on the firm's assets, or sell off the firm's assets.
(Reporting by Patrick Rucker and Karey Wutkowski; Editing by Jonathan Oatis)
