Does Anyone feel like Bailing

[classicman]

Meltdown 101: How do bank 'stress tests' work?

WASHINGTON – After weeks of speculation, regulators led by the Federal Reserve are telling banks how they fared in the "stress tests" at the center of the Obama administration's financial rescue plan.

Markets rallied and investors breathed a little easier Friday after a Fed news release on the methods underlying the stress tests. But the white paper, which one former bank examiner for the Fed called "not for mass consumption," left lay people wondering what it all means.

Here are a few questions and answers about the stress test's methods and the next steps for shoring up the financial system.

Q: What is this "stress test"?

A: The "stress test" is actually two tests measuring how much value banks' assets — loans it's made along with various other investments — would lose over the next two years under different economic scenarios.

The first scenario was based on predictions about the current recession. It assumed unemployment will reach 8.8 percent in 2010 and house prices will decline by 14 percent this year. The second scenario was for a worse-than-expected downturn. It said unemployment will reach 10.3 percent in 2010 and house prices will drop by 22 percent this year.

After testing banks' assets to see how much value they could lose, officials compared the losses to the banks' capital cushions — basically, the money they've got in reserve — to see if the banks could survive a bad recession.

Q: Who participated?

A: The tests were run on 19 large bank holding companies, including an insurer, an auto finance company, a credit card company and banks ranging from massive Wall Street houses like Citigroup to regional banks like KeyCorp and PNC Financial Services. The banks all have $100 billion in assets, and together hold half the loans in the U.S. banking system and two-thirds of the assets, according to the Fed.

The tests were performed by the banks' regulators, including the Federal Reserve banks, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

In case you're curious, here's a full list of the Big 19: JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley, MetLife Inc., PNC Financial Services Group Inc., U.S. Bancorp, Bank of New York Mellon Corp., GMAC LLC, SunTrust Banks Inc., State Street Corp., Capital One Financial Corp., BB&T Corp., Regions Financial Corp., American Express Co., Fifth Third Bancorp and KeyCorp.

Q: What did the regulators find out?

Nice article in laymans terms of what it is and whatnot.