Bank "Stress Tests" To Be Completed By End of April

logo - department of treasury - banksDetails of the Capital Assistance Program (CAP) were released by the Treasury Department on Wednesday afternoon.

The program includes a number of different components, including "stress tests" on 19 of the biggest financial institutions in the United States and capital infusions in the form of preferred share purchases.

The Treasury Department announced that it will be conducting "stress tests" on 19 financial institutions that:

a) received TARP (Troubled Asset Relief Program) money
b) have assets of over $100 billion dollars

This will help the Treasury Department to determine whether or not these institutions will need further money under the new CAP program.

Some of the institutions that will be subjected to these "stress tests" include:

JP Morgan Chase
Goldman Sachs
Morgan Stanley
American Express

The "stress tests" will analyze the projected well-being of each firm given two different scenarios.

The first, which is being called the "baseline scenario", would analyze the standing of an institution assuming that there is a 2% decline in GDP numbers in 2009, as well as an 8.4% unemployment rate in 2009, an 8.8% unemployment rate in 2010 and a 14% drop in home prices in 2009.

The second scenario, which is being called the "more adverse" scenario, would calculate the effect on an institution given a 3.3% decline in GDP in 2009, an 8.9% unemployment rate in 2009, a 10.3% unemployment rate in 2010 and a 22% drop in home prices.

If these "stress tests" reveal that a bank needs additional capital, then it will have up to six months to raise this capital from private investors.

Failing that, banks would be forced to accept more funding from the government through the form of preferred share sales. These preferred shares would have a 9% dividend yield and be convertible into common shares (at a 10% discount to their price on February 9th).

As far as I am aware, the results of these "stress tests" won't be released to the public by the government. However, I can't imagine these banks not releasing the results of the tests to the public, as I am sure that shareholders in the companies will be intensely interested in the results.

The "stress tests" are expected to be completed by the end of April.

Filed under: The Economic Meltdown | General Knowledge

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