Published April 16, 2009

US to reveal some sensitive details of banks

Non-disclosure may cause investors to flee from those judged to be weak

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(WASHINGTON) The Obama administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumoured to be weakest.

While all of the banks are expected to pass the tests, some are expected to be graded more highly than others.

Officials have deliberately left murky just how much they intend to reveal - or encourage the banks themselves to reveal - about how well they would weather difficult economic scenarios over the next two years.

As a result, indicating which banks are most vulnerable still runs a risk of doing what officials hope to avoid.

The decision on how to handle the stress tests underscores the delicate balancing act by the government, which has spent hundreds of billions to stabilise banks.

Despite some signs of improvement in the financial system, however, many economists remain concerned that banks are still weighed down with toxic assets stemming from the housing downturn.

Until now, the Treasury Department has simply said that it would reveal the amounts of any new infusions of capital into banks that regulators judged to be at risk if the economic downturn was prolonged, or the economy took a further dive.

The administration's hand may have been forced in part by the investment firm Goldman Sachs, which successfully sold US$5 billion in new stock on Tuesday and declared that it would use the proceeds and other private capital to repay the US$10 billion it accepted from the government in October.

That money came from the Troubled Asset Relief Program (TARP) and Goldman's action was seen as a way of pre-disclosing to the markets the company's confidence that it would pass its stress test with flying colours.

Goldman's action has put pressure on other financial institutions to do the same or risk being judged in far worse shape by investors.

The administration feared that details on healthier banks would inevitably leak out, leaving weaker banks exposed to speculation and damaging market rumours, possibly making any further bailouts more costly.

The Goldman move also puts pressure on the administration to decide what conditions will apply to institutions that return their bailout funds. It is unclear if Goldman, for example, will continue to be allowed to benefit from an indirect subsidy effectively worth billions of dollars from a federal government guarantee on its debt, a programme that the Federal Deposit Insurance Corp (FDIC) adopted last autumn when the credit markets froze and it was virtually impossible for companies to raise cash.

In ordinary times, regulators do not reveal the results of bank exams or disclose the names of troubled banks for fear of instigating bank runs or market stampedes out of a stock. But as top officials at the Treasury and the Federal Reserve focused on the intensity with which the markets would look for signals about the nation's biggest banks at the conclusion of the stress tests, the administration reconsidered its earlier decision to say little.

'The purpose of this programme is to prevent panics, not cause them,' said one senior official involved in the stress tests who declined to speak on the record because the extent of the disclosures are still being debated. 'And it's becoming clearer that we and the banks are going to have to explain clearly where each bank falls in the spectrum.'

Two senior government officials said on Tuesday that they were now likely to encourage the banks to reveal a range of information, perhaps including the size of losses that the banks could suffer under each of the stress scenarios. -- NYT