To Disclose or Not to Disclose

More speculation is being made about the stress test results and what the U.S. Government will eventually disclose to the public, if anything.  Here's what was reported in the Wall Street Journal yesterday.

It isn't clear precisely what information the government might disclose. It remains possible the data won't be specific to individual banks. But some within the administration believe a certain amount of information needs to be released in order to provide assurance about the validity and rigor of the assessments. In addition, these people also are concerned that the tests won't be able to fulfill their basic function of shoring up confidence unless investors are able to see data for themselves. Staff at the various regulatory agencies have been discussing the matter for several weeks and are expected to brief top regulators as soon as this week. One possible solution: Aggregating the data provided by the banks so the government could provide a broad snapshot of the banking industry's health without disclosing firm-specific data.

Based on this report, it seems they are going in circles trying to determine what to do.  However, for an administration that is seeking to improve transparency and accountability, the answer should be clear.

Banks Are "Stressed Out" Over Tests

Financial institutions across the U.S. are bracing themselves for stress testing by the U.S. Treasury.  The results of these stress tests will determine which institutions are healthy enough to survive and which ones are terminally ill.   Last Friday, the Wall Street Journal highlighted the results of one research firm's recent stress test report.  

"Bank and thrift failures are a function of capital, liquidity and regulatory risks. Some of the largest "failures" of last year were the result of a combination of these factors," the stress-test report by Sanford Bernstein said.  Liquidity refers to money banks need to fund their day-to-day operations. Longer term, capital is needed to make investments and, most importantly right now, to provide a cushion for delinquent loans.  Liquidity risk is largely mitigated at this point -- banks are liquid enough to be able to make the loans their borrowers want. But capital and regulatory risk are "alive & kicking," the report said. While regulators put in place programs to prevent bank failures through capital infusions, those programs could essentially wipe out common equity at some banks, leading to "common equity failures," Sanford Bernstein wrote.

The next 4 - 5 months will be very interesting and could result in a completely different landscape for financial institutions.  Expect a great deal of change and upheaval as these capital and regulatory risks begin to crystallize.