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Just how vulnerable are US banks?

A 'stress test' aims to assess which banks would need help if the economy worsened.

By Ron SchererStaff writer of The Christian Science Monitor / February 23, 2009

New York

It is a computer exercise only: On Wednesday, the US government will take the worst-case scenario for the economy and try to figure out what that might mean for each of the nation’s major banks.

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Would banks from JPMorgan Chase in New York to Bank of America in Charlotte, N.C., have enough capital to survive? Or should the government be planning to inject more public money into the banking institutions considered critical to the nation?

Despite the Obama administration’s interest in greater transparency in government, economists doubt that the results of what is being termed “stress testing” of each of the major banks will be made public.

After all, there’s no sense causing more angst to a financial system that is already under a high degree of stress by revealing which banks might not survive without more public aid. But, the results might help Treasury Secretary Timothy Geithner and other federal regulators have some kind of plan in place if the recently enacted fiscal stimulus package falls short, the recession drags on for another year, and the unemployment rate spirals to double-digit levels.

“Basically, what they are doing is planning for the worst and hoping for the best,” says Joel Naroff of Naroff Economic Advisors in Holland, Pa. “That does not mean the worst will actually occur.”

Bank stress already

The government exercise comes at a time when the stocks of many bank companies are under severe pressure on Wall Street. According to press reports, Citigroup, one of the nation’s largest banks, has asked the government to take a larger equity stake in the company – perhaps as much as 45 percent of the bank. So far, the US government has invested $45 billion in Citi, which is based in New York.

The Citigroup move follows a terrible week when the price of its stock dipped as low as $1.61 a share, indicating the entire company was worth $9.7 billion. By mid-afternoon Monday, the price had bounced back some, to above $2.20 a share.

“This is not a reflection of what the bank is worth,” says Sung Won Sohn, a professor of finance at California State University, Channel Islands and the former president of a bank. “If I had $10 billion, I’d like to buy Citigroup.”

Not spreading fear

In announcing the banking stress test, the nation’s financial regulators were quick to try to keep the public from jumping to conclusions about the current state of the banking industry. “Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized,” the regulators said in a joint statement Monday.