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US panel says bank tests were too easy

Projections didn't go far enough, report concludes

By Anne Flaherty
Associated Press / June 9, 2009
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WASHINGTON - A government test of whether 19 major banks could survive a further downturn in the economy may have relied on too rosy a scenario and should be repeated, independent investigators say.

In a report to be released today, the Congressional Oversight Panel for the government's $700 billion financial rescue effort says the Federal Reserve used a "conservative and reasonable" approach to assessing the health of the nation's biggest banks.

But, the panel added, the Fed's worst-case scenario does not go far enough. For example, the "stress tests" conducted by the Fed were based on the 2009 unemployment rate average of 8.9 percent. Unemployment in May climbed to 9.4 percent.

"While no one should gainsay the potentially positive results of the tests, it would be equally unwise to think that those results reflect a diagnosis of all of the potential weaknesses or create a necessarily sufficient buffer against future reverses for the banking system," the panel wrote.

Elizabeth Warren, the Harvard University law professor who heads the panel, was expected to testify today on the group's findings before the Joint Economic Committee.

Last month, the Fed found that 10 of the 19 banks needed additional capital. Bank of America, Citigroup, and Wells Fargo are among the banks told to boost capital by a total of $75 billion to cover potential losses.

The Federal Reserve said yesterday that plans submitted by those banks, if implemented, would be enough to help them survive a deeper recession.

The Congressional Oversight Panel says that additional capital held by the banks should not be interpreted as an end to the financial crisis.

The panel recommended that the Fed repeat stress testing so long as banks continue to hold large amounts of bad debt on their books. The panel also suggests that banks be required to run their own internal stress tests and share those results with federal regulators.