We could pump money into the banks and in a lousy credit environment they’re not supposed to lend

TO BE NOTED: From Bloomberg:

"Regulators Said to Plan Stress-Test Disclosures May 7 (Update2)

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By Craig Torres

May 1 (Bloomberg) -- The Federal Reserve and U.S. banking regulators delayed the release of the results from stress tests on the country’s 19 largest banks by three days, to May 7, according to a government official.

The government will unveil both aggregate information about the capital buffer required to absorb losses if the recession worsens and firm-specific details, the official said on condition of anonymity. Regulators will make the announcement after financial markets close, the person said.

The delay follows an internal debate among regulators about how best to reveal to markets the health of the biggest banks, information usually reserved for bank examiners. The details may help investors distinguish strong from weak banks, leaving the latter to turn to the government for capital.

Officials “are trying to whittle the herd,” Joe Davis, an economist for Vanguard Group Inc. in Malvern, Pennsylvania, said in a Bloomberg Television interview. “It is a very messy process.”

Regulators have said the tests aren’t pass or fail and are aimed at ensuring lenders can maintain a solid capital base and sustain lending during any worsening of the economy. Fed Chairman Ben S. Bernanke, a Great Depression scholar, has said a sustainable recovery isn’t possible without a stable financial system.

Capital Ratio

Banks were given preliminary results from the stress tests last week, and have been discussing the findings this week with regulators. Officials favor tangible common equity of about 4 percent of a bank’s assets weighted for risk and Tier 1 capital worth about 6 percent of assets weighted for risk, according to people familiar with the tests.

Tangible common equity is a measure of financial health that excludes intangibles such as goodwill or trademarks that can’t actually be used as payments.

The Fed and the Treasury are trying to get the banking system to build a capital buffer as the worst U.S. recession in half a century reduces spending and jobs. Unemployment rose to 8.5 percent in March, the highest level since 1983.

“It is just a cultural clash of epic proportions to have the government tell them they’ve got to lend when they are trained not to lend in a time like this,” said Allen Sinai, president of Decision Economics Inc. in New York. “We could pump money into the banks and in a lousy credit environment they’re not supposed to lend.”

More Loans

Commercial and industrial loans held by commercial banks in the U.S. were 4.3 percent higher at $1.54 trillion in March 2009 compared with March 2008, according to Fed data. Real estate loans held by banks over the same period rose 4.7 percent to $3.83 trillion. By comparison, business lending grew 13 percent to March 2007 from the same month a year earlier, and real estate lending grew 12 percent.

Dowd Ritter, chief executive officer of Regions Financial Corp., said in an April 21 interview that the Treasury’s Troubled Asset Relief Program, or TARP, the taxpayer-supported fund the government has used to put money into banks, has become “a way to look at social program implementation.”

“The rules change daily,” he said. Regions is the 12th largest U.S. bank by assets.

‘Burn-Down’

R. Scott Siefers, managing director at Sandler O’Neill Partners L.P. in New York, said regulators may be conducting an exercise similar to what investors have been doing for months. So-called “burn-down” analysis looks at how much common equity will be destroyed if assets are marked to worst performance.

“The regulatory community seems to be moving toward a heavier focus on tangible common equity,” said Siefers.

The Standard & Poor’s Financials Index, which comprises 80 companies, rose 22 percent in April as officials played down the prospect of nationalization and as the economy showed signs of stabilization. The gauge fell 1.7 percent today.

Treasury Secretary Timothy Geithner told U.S. lawmakers yesterday there is no need for new bank bailout money as of now, Senate Budget Committee Chairman Kent Conrad said. That indicates that the stress-test banks won’t need to tap more than the current remaining funds in TARP. Geithner said April 21 that $109.6 billion remains, or $134.6 billion including expected repayments in the coming year.

Still, some financial analysts have warned that a bigger government role may be unavoidable.

Capital Needs

“I don’t think people understand the amount of capital these companies are going to need,” said Paul Miller, analyst at FBR Capital Markets Corp. in Arlington, Virginia. If investors don’t step up, the government will have to increase its stake in several financial institutions, he said.

The 19 firms include Citigroup Inc., Bank of America Corp., Goldman Sachs Group Inc., GMAC LLC, MetLife Inc. and regional lenders including Fifth Third Bancorp and Regions.

The banks in the test hold two-thirds of the assets and more than one-half of the loans in the U.S. banking system, according to a Fed study released April 24.

Scenarios for the stress tests included a baseline outlook of a 2 percent decline in gross domestic product this year, with the national unemployment rate averaging 8.4 percent. The more adverse scenario was based on a 3.3 percent contraction this year with an average unemployment rate of 8.9 percent this year and 10.3 percent next year.

Fed officials said last week that supervisors will work with banks to maintain the buffer, indicating firms with high- risk portfolios will face a bigger challenge maintaining it.

Regulators used the market shocks of the second half of 2008, when Lehman Brothers Holdings Inc. declared bankruptcy, as the model for testing banks with trading portfolios of $100 billion or more.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net"