‘Stress Tests’ Favor Big Wall Street Banks

According to a Federal Reserve document obtained by the Associated Press, the government’s “stress tests” of 19 large banks “take a harsher view of loans than of other troubled assets. That approach favors a few Wall Street banks while potentially threatening major regional players.”

From AP: The regulators’ focus could spell trouble for big regional banks undergoing the tests. Their portfolios have more individual loans and fewer of the big pools of securitized loans that Wall Street giants specialize in.

Some analysts said regulators are favoring the largest banks because if even one failed that would pose a severe economic risk. Banks that deal in securities are more interconnected to other corners of the global financial system.

Regulators also face pressure to highlight the weaknesses of some banks, or critics will dismiss the tests as a whitewash. That would undermine the goal of improving confidence in the financial system.

Under one scenario, the test assumes banks will see “no further losses” on these complex securities at the heart of the credit crisis. By contrast, it estimates that the banks’ individual loans will lose up to 20 percent of their value.

The methodology “certainly penalizes those banks that are more involved in traditional banking, which frankly have been performing better in recent months,” said Wayne Abernathy, a former Treasury Department official now with the American Bankers Association.

He said banks’ loan portfolios have lost only about 5 percent of their value so far, whereas the value of complex securities are down 30 to 40 percent.

AP’s piece seem to contradict Treasury Spokesman Andrew Williams’ claim made yesterday that there was “no basis” for a report that said “stress tests” on the health of the nation’s top banks showed several were “technically insolvent,” since the department had not yet received the results.

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