Breathing easier after bank stress tests? You shouldn't

Breathing easier after bank stress tests? You shouldn't

By Kevin G. Hall and Greg Gordon McClatchy Newspapers

WASHINGTON — Largely unnoticed in last week's government report on the condition of the nation's biggest banks was the disclosure that five of them, topped by Bank of America, could lose $99 billion from the kinds of exotic bets that sank the global economy.

Even that figure, however, could prove to be exuberantly optimistic if the economy hits new depths, a McClatchy analysis has found.

Moreover, the regulators' recent "stress tests" on bank holding companies didn't fully measure the cash squeeze those institutions could face if souring conditions forced them to post tens of billions of dollars in additional collateral on some of their insurance-like bets, known as derivatives.

The banks' financial reports to regulators for the quarter ending March 31 also tell a potentially ominous story about their holdings of derivatives, instruments whose value is tied to an underlying asset, such as a pool of subprime mortgages. Seventeen of the 19 largest banks reported that, in the event of an economic catastrophe, they face combined derivatives losses exceeding $568 billion.

The recent stress tests measured the ability of the 19 banks to withstand economic conditions more adverse than the present downturn. The results prompted regulators to order 10 of the banks to raise $75 billion in new capital as a buffer against a worsening economy.

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