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Extra4/24/2009 12:01 AM ET

What are bank stress tests?

The government is testing the financial strength of 19 of the nation's biggest banks and thrifts. What will the results mean to you?

By Bankrate.com

Are your finances strong enough to withstand another couple of years of this battering economy? Can you suffer additional losses and still pay your bills and, if not thrive, at least survive if the economy continues to deteriorate?

That's what federal banking regulators are trying to determine with the country's largest banking institutions. The stress tests you've heard about are "forward-looking economic assessments." Do these organizations have enough capital to withstand another two years of an economy that may be worse than presently anticipated?

Nineteen banks and thrifts, each with more than $100 billion in assets, are being put to the test. As a group, they hold an estimated two-thirds of the assets in the U.S. banking system. Most Americans do business with one or more of these institutions. Among those being tested are JPMorgan Chase (JPM, news, msgs), Bank of America (BAC, news, msgs), Citigroup (C, news, msgs), Wells Fargo (WFC, news, msgs) and Goldman Sachs (GS, news, msgs).

The stress tests will evaluate each institution's finances under two scenarios -- a baseline and a more adverse scenario.

Baseline scenario

Economy -- Shrinks by 2% (adjusted for inflation) in 2009 and grows by 2.1% in 2010.

Unemployment -- Averages 8.4% in 2009 and 8.8% in 2010.

Home prices -- Drop by 14% in 2009 (from where they ended December 2008) and drop 4% in 2010 (from December 2009).

More adverse scenario

Economy -- Shrinks by 3.3% in 2009 and grows by 0.5% in 2010.

Unemployment -- Averages 8.9% in 2009 and 10.3% in 2010.

Home prices -- Drop 22% in 2009 (from where they ended December 2008) and drop 7% in 2010 (from December 2009).

The Federal Reserve is expected to release information May 4 on the results of the stress tests. Institutions that aren't well-capitalized will have six months to try to raise the necessary funding in the private markets. Any that can't raise the money will be bailed out by the government.

"The whole idea of going through this process is to give people greater confidence in the banking system," says David Waddell, the CEO and senior investment strategist at Waddell & Associates in Memphis, Tenn.

"I'd be surprised if they do anything that would create concern over the banking system," he said. "But the government's intentions are foggy. It's probably able to go back to Congress and say they need more money but they have to do it in a way that doesn't spook the market and doesn't cause a run on the banks."

Even if information released clearly shows which banks are weak, Waddell says he doesn't think consumers will stop banking with a particular institution any more than they quit flying when the government's National Threat Advisory is elevated.

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Consumers may not feel the need to take their money elsewhere based on the stress test results, but they should make sure their deposits are fully protected. Generally, that means staying within the Federal Deposit Insurance Corp. limit of $250,000 per depositor. But Waddell isn't a fan of consumers blindly putting their money in an institution just because it's covered by the FDIC.

"Part of the problem with the way consumers approach banks is that the government is there guaranteeing deposits so we don't have to do our own due diligence. If there's a weak bank in my local market and I have $100,000 in a checking account there, I don't care because the government has guaranteed it. There's a moral hazard, in my opinion, in the system, and that moral hazard has only gotten bigger since the FDIC raised the limit to $250,000 on deposits."

Small enough to fail

The FDIC says its Deposit Insurance Fund should be sufficient for the foreseeable future, and if additional funds are needed, it has a Treasury Department line of credit that can be tapped. Nevertheless, it will be interesting to see whether the FDIC's coverage limit remains at $250,000 after Dec. 31. Deposit insurance is slated to fall back to $100,000 per depositor Jan. 1, 2010. (Insurance coverage for some retirement accounts, such as IRAs, was permanently increased to $250,000 per depositor in 2006.)

Staying within FDIC limits -- or National Credit Union Administration (NCUA) limits if you're with a credit union -- is paramount to protecting your deposits. There are trillions of uninsured dollars in bank accounts across the nation.

There are ways to protect excess deposits. Some banks will divide your excess deposits among nonrelated banks within a particular network.

The FDIC shows how to properly title your accounts so you get the most out of available coverage. The agency also provides a calculator to determine your coverage.

While the government is focusing on the nation's biggest institutions -- and propping them up when needed -- there are more than 8,000 institutions that, apparently, aren't too big to fail.

This article was reported by Laura Bruce for Bankrate.com.

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Friday, April 24, 2009 7:57:45 AM
The government has focused exclusively on propping up the banks, feeding them more and more capital, while individuals are falling by the wayside.  President Obama does not have the best people giving him advice.  WHERE is THE ONE person who understands the ordinary person and how they have to survive this mess the Bush people got us into?  THe process of dealing with those toxic assets will bring about another battle into the homes of individuals who don't need the constant harassment and deluge of phone calls from collection people trying to collect debts that have been discharged in bankruptcy or where the statute of limitations has run.  This is another load on the American people that will again, or continue to disrupt their financial well-being while the same banks that received the billions of dollars of bailout  money try to collect on toxic assets that SHOULD have been dealt with up front - BEFORE the banks received money.  But the President's counselors are all from the banking and investment industries.  WHO represents the people????
Friday, April 24, 2009 9:02:59 AM
Here we go again, another person venting an opinion that does not understand the facts.  "by the people" if you think the Bush people got us into this, than you might as well be shouting out that you don't know anything.  This problem was far in the making before Bush.  In FACT!, Bush attemped to address the issue with the financial industry risks in 2003 and 2004 but was quickly brushed off by the likings of the Barney Franks of Congress.  Do some research and you will see.  Now, I am not pro Bush or anti Obama, You must be objective and factual before making these kind of un-informed comments.  Congress of both parties is responsible for this mess, you idiot!
Friday, April 24, 2009 9:26:06 AM
note how special it is that the media claims government will have to bail out the same banks over & over.  It's the responsible hard working tax payers money!!!  Government does not earn money.
Friday, April 24, 2009 10:24:25 AM
You say "This problem was far in the making before Bush.  In FACT!, Bush attemped to address the issue with the financial industry risks in 2003 and 2004...".  Excuse me but didn't Bush take over his responsibilies as our Leader following the 2000 election.  Was the economy not pretty darn stable at that time.  The attempted to address this issue in 2003 and 2004, Gee wasn't that part of his campaign years for second term.  If Bush had any intention of addressing this issue he would have done so and not backed down to Barney Franks.  Bush was the problem and we are headed for better times - we will have to bite the bullet and pay for past mistakes, both the peoples and governments. 
Saturday, April 25, 2009 9:08:33 AM

It still amazes me how the Bush administration invaded Iraq, based on faulty intelligence, twisted congressional arms to pass Medicare Part D, which was based on false assumptions and outright lies, and now we come to the point of financial distress and we still wonder why we are in this situation.  How much money did we borrow to finance the war in Iraq?  How much does Medicare Part D cost each taxpayer on an annual basis? 

 

Would it not have been prudent to have postponed any new  domestic entitlement programs during wartime?  I don't think Mr. Obama had much say so in crafting the facts that led us into this trap!

Saturday, April 25, 2009 6:52:46 PM
In less than 100 days President Obama has taken us over 4 times deeper into debt than what it took Bush to do in 8 years.  What I want somebody to tell me is how we get out of debt by going much further into debt?  Who are the bailouts really benefiting?  Not the average guy/gal but the big banks and the Madoffs of this world.  There is almost zero supervision of how all the Trillions are being spent - that is a recipe for disaster.
Monday, April 27, 2009 5:00:41 PM
I think instead to give this quantity of money to these banks-which anyway are giving nothing back to the people but more debts- they will give at least 1/2 million to each tax payer hard working citizen to invest produce and get on going the market, I think money will move more more investments and with that amount anyone see the doctor they want get a decent roof pay debts and invest in a small business or in better education.
Thursday, April 30, 2009 8:11:46 AM
The principle of accountability has gone by the wayside as liberalism crept it's way into the minds of "the people" and into the hands of the government. Liberalism promotes entitlement and lack of accountability. It enables losers to be even bigger losers. The banks were required to lend to "the people" under various fed'l programs and regulations. And "the people" went for it. Loans were obtained "by the people" who previously would not have qualified -- and with good reason. Too many of them lacked self-control as they bought beyond their long-terms means, and the downward spiral began. And Bush abandoned free market principles failing to let it self correct as it would without intervention. "The people" weren't held accountable, the complicit financial institutions were not held accountable and the federal government failed to protect "the people" and the system. Then "the people" blamed Bush. And Obaaaaama became the leader of the sheep. And now "the people" want everyone else to pay for their lack of self-accountability. The "free market" and "free people" learn from their mistakes. "It" and "they", with the principle of self-accountability can self-correct. But "the people" got what they thought they wanted (temporarily) but don't want to be responsible for their stupid decisions. So stop blaming Bush and embrace "Change" -- change your liberal "loser" mentality. 
Sunday, May 03, 2009 5:20:36 AM
Hey, Gar, it's time to get over your BDS- "Bush Derangement Syndrome"!! Get your head straight, don't be so partisanly myopic. The seeds of this were started under Carter, 1977 Community Reinvestment Act, accelerated under Clinton. Banks being forced to make bad loans is what caused this, exacerbated by practices of Fanny and Freddy. I expect more suicides from their execs- at least those with any sense of morality. Obama did not create any of this problem. Bush and several Republicans numerous times tried to get action on F & F, but were fought vociferously by the perpetrators. Obamas remedies of the problem, nationalizing banks and industry, will prove disastrous. We could well be a workers paradise like Cuba, with almost no functional industry, driving fifty year old cars in another generation, unless his policies are stopped!
Sunday, May 03, 2009 6:29:26 AM

Say, Walrus...

  I categorically deny your extreme views... we'll be pedaling fifty-year-old pedicabs for the ChiComm overlords, 'cuz the cars & arms will have all disappeared in the celebratory buy-back pogroms...err, "programs."

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