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Results of Bank Stress Tests Could Cause Havoc

From: "Results of Bank Stress Tests Could Cause Havoc, Analysts Say
Even if Only a Few Fail, the Ripple Effect Could be Significant", Sue Asci, Investment News, 5/1/09

Only a few banks are expected to fail the Federal Reserve’s stress tests, but the fallout could be a severe, ranging from triggering the collapse of other banks to a disassembling of the banking model, analysts say.

The report on the test of the 19 largest banks was originally due to be released on Monday, but the Federal Reserve is postponing the release until later in the week so that jittery bank executives can hash out the preliminary findings with examiners, according to Bloomberg.
Three to four banks are likely to fail the stress test, which will become a template for examining the remaining U.S. banks, said Richard Bové, a bank analyst at Rochdale Securities LLC of New York.

There were 8,305 banks in the United States as of Dec. 31, according to the American Bankers Association, a Washington-based industry group.

“It is my assumption that at least 150 of those banks will fail and go out of business.” Mr. Bové said. “I think there are a large number of regional banks that will fail. They are hanging on now, but they won’t pass if these tests are applied to these institutions.”

After that, “a new series of banks will emerge, created from the failures,” Mr. Bové said.
In the short term, the test results will affect the markets, Mr. Bove said.

Despite government claims that no banks will be allowed to fail as a result of the tests, investors will probably sell off stocks of banks with poor results, he said.

“Investors will want to move their money away from a bank that appears tainted to a bank that is capable of paying back their [Troubled Asset Relief Program] funds,” Mr. Bové said.
Other observers agree that a portion of the 19 banks will fail the test.

“They have to have some failures for people to have confidence that it was a serious enough test,” said James Sinegal, an equity analyst on the banking team at Chicago-based Morningstar Inc.

The stress tests could also fuel a movement towards structural reform.

“All of the 19 banks are operating well beyond their economies of scale,” said Mike Moebs, an economist and president of Moebs Services Inc, a Chicago-based economic research firm.

“The basic core model is busted. I think it’s very likely that we’ll see the disassembling of the current banking model.”


Written By: rnybeck
Date Posted: 5/7/2009
Number of Views: 2184

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