Big banks seek better scores on stress tests

WASHINGTON -- As executives of the nation's largest banks review their stress-test results, even top performers are lobbying regulators to raise their scores before the numbers are finalized Friday.

Any banks found to need more capital face tough choices that would hurt shareholders and put taxpayer money at greater risk.

The Federal Reserve on Friday privately gave the 19 largest financial firms preliminary results of tests designed to see how they would withstand a harsher recession.

Executives sifted through the data over the weekend, devising arguments they hope will persuade regulators to boost their scores, according to two industry officials who requested anonymity because regulators have barred them from discussing the process.

Banks have until today to make their cases. They will receive the final test results Friday, and the information will be released publicly Monday.

The typical bank customer should not be concerned. Depositors with less than $250,000 in a bank are fully insured by the federal government, regardless of the bank's financial health, said Bill Uffelman, chief executive officer of the Nevada Bankers Association. In many cases, depositors are insured for more than $250,000 but they need to refer to the Federal Deposit Insurance Corp. to make sure, he said.

Many local banking executives expressed concern.

"The test says nothing about the banks solvency or viability," Uffelman said.

"Federal examination results have long been considered completely confidential, and for all the right reasons. Being an ex-regulator I feel releasing such information sets a unwise precedent even if the stress test results present a positive picture," said William Martin, chief executive officer of Service1st Bank.

William Chu, chief executive officer of First Asian Bank, said disclosing the information will boost the public's confidence in banks only if all of the banks do well.

"If everybody passes, that's great. That would build confidence," Chu said. If one or more need additional capital, "it could potentially shake the roots of the financial markets."

Diane Fearon, chief executive of Bank of George, said she hoped the news will give confidence to the public.

A stress test "can be useful, but it isn't the full answer, because there are so many questions about what the future will hold," Fearon said.

Tim Coffey, vice president of FIG Partners, a firm that specializes in bank stocks, took a different perspective.

"I think the importance of the stress test is overblown," Coffey said. "The market has been doing its own stress test on these banks since last October," he said. The banks that appear to be in poor shape are selling for less than $10 a share, he said.

The results will determine the fates of the companies, which together hold one-half of the U.S. banking system's loans. Banks found to need more capital face several possibilities: The government could convert its stake in them to common shares, force them to raise money from investors or eventually release more funds from the Treasury Department's $700 billion financial bailout.

For the Treasury, the easiest way to bolster bank balance sheets is to convert the government's existing stake from preferred shares -- a form of debt -- into common shares that carry voting rights. This would help the Treasury avoid returning to Congress for more bailout money -- a request lawmakers are likely to rebuff.

The banks' options are designed to ensure banks have enough cash to withstand the mounting loan losses they would absorb in a bleaker economy.

If the test showed a bank would need more money to endure a much worse recession, regulators will force it to meet higher standards for capital reserves, to offset possible future losses.