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Washington - Regulators trying to stabilise the financial system could unwittingly roil it when they explain their methods on Friday for stress-testing the largest banks.
Officials will privately begin telling the largest 19 financial institutions how they performed. But investors will be scrutinising the test methodology for clues about which banks are in trouble.
The results won't be publicly released until May 4.
The slow-motion roll-out is intended to blunt market reaction to the news of which banks are healthy, which ones could fail if the recession worsens and which need more money to survive.
News reports, including a confidential outline of the tests first reported by The Associated Press this week, have led analysts to start handicapping which banks could fail. The speculation will intensify with Friday's release of the test methodology.
"I'm worried about the overreaction - people selling every bank short and pulling out all their deposits and hiding their money in the mattress," said Scott Talbott, a lobbyist with the Financial Services Roundtable, which represents the biggest financial firms.
Regulators are striving to release enough information about the stress tests to inspire confidence. But they don't want to give analysts so much detail that they can run their own tests on the banks before the official release of results.
The stress tests subject banks' balance sheets to two scenarios. One reflects current forecasts for the recession. The other assumes the recession will worsen, according to the document, produced by the Federal Reserve (Fed).
Officials also are examining the quality of banks' loans, according to an industry official and a regulatory official who spoke on condition of anonymity because they weren't authorised to discuss the tests publicly.
The goal is to see if banks have enough money reserved to withstand these losses. If they don't, regulators will force banks to boost their capital, with private or government money, and will take other steps to strengthen their balance sheets.
Recent economic indicators show the economy is approaching the more severe of the government's two scenarios, Miller said.
"The more information we get as to what those outcomes are likely to be ... the more investors will drag down the banks that aren't perceived to be healthy," said Brown, who studies market behaviour.
Once investors can distinguish stronger from weaker banks, they could start selling off weaker banks that remain stable but might falter if the recession got much worse.
Giving the banks their test results on Friday, more than a week before they're to be released, is supposed to give them time to process the data internally.
The Fed, which is overseeing the tests, asked banks not to reveal their results during quarterly earnings announcements. Regulators worry investors might run down banks without any good news to announce.
Other analysts said one reason for the financial market volatility is that banks already are betting, through their own market trades, that each other's stocks will decline.
- AP
