- The Washington Times - Saturday, February 28, 2009

Big banks are taking turns on the treadmill to see how well they can take a pounding.

The government began to conduct financial “stress tests” this week to determine how well the biggest U.S. banks could hold up if the recession gripping the country got worse.

What are these stress tests, and what will the federal examiners be looking for? Will the banks, which have received billions in aid under the government rescue program, get a “passing” or “failing” grade on them? What will the results be used for?

Here are some questions and answers about the Obama administration’s newest step in addressing the most severe financial crisis since the 1930s.

Q: As if we don’t already have enough stress from the economic meltdown: What are these “stress tests,” anyway?

A: Just as doctors put patients on a treadmill to check for possible heart disease, the government is looking at the financial conditions of the biggest banks - Citigroup Inc., Bank of America Corp., Goldman Sachs Group Inc., JPMorgan Chase & Co., about 20 in all - to help decide whether they have sufficient capital to withstand fresh shocks to the economy over the next two years.

Q: How do they work?

A:The tests use computer-generated models to gauge the effect of “stressors” on the bank’s financial condition, trying out several hypothetical settings of factors such as interest rates, unemployment and business conditions.

Q: What scenarios will the Treasury Department use in this new stress testing?

A: The tests are expected to take into account a broader-than-usual range of economic indicators. Also, looking two years ahead pushes the tests well beyond the usual time frame of six months.

The banks will be tested under two economic scenarios: what the government calls a “baseline” and “a more adverse scenario,” reflecting a deeper and longer recession.

The scarier scenario includes a 3.3 percent decline in gross domestic product this year; unemployment rising to 8.9 percent this year and 10.3 percent in 2010, from the current 7.6 percent (already the highest in more than 16 years); and home prices plunging 22 percent this year and 7 percent next year.

Q: That sounds dire. Should we be worried about this worse-case scenario?

A: Government officials say - stress, even - that the worse-case “adverse” scenario is unlikely to occur. But they also say it can’t be ruled out.

Q: Will regulators be getting their hands on more information from the banks than they usually have access to, in order to conduct these stress tests?

A: No, they won’t get any more information than usual - they just plan to scrutinize it in a more intensive way.

Q: How long will the stress tests take, and will banks be graded on them? What will the government do with the results?

A: They are expected to be completed by the end of April. And there won’t be any grades.

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