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New bank ‘stress tests’ may shake things up

Move by feds may threaten regional banks

WASHINGTON – The government is giving Wall Street banks a helping hand, but this time it’s not a handout.

The federal bank “stress tests” rate the individual loans held by big regional banks as riskier than the complex troubled assets held by the industry titans, according to a Federal Reserve document obtained by The Associated Press.

That approach could threaten some major regional banks while making the national banks appear in better shape when the government releases the results of the tests next month.

Regulators are administering the tests to 19 large financial firms to determine which banks are healthy, which need more help and which might fail if the recession worsens.

Under one scenario, the tests assume banks will see “no further losses” on the complex securities, according to the document obtained by AP. By contrast, it estimates that individual loans will lose up to 20 percent of their value.

Regional banks are holding more individual loans and fewer of the securities Wall Street giants specialize in – complex derivatives backed by huge pools of mortgage-backed loans and other debt.

Analysts say regulators are probably favoring the largest banks because if even one failed, it would pose a grave financial risk. Banks that deal in securities are more connected to other corners of the global financial system.

Regulators also face pressure to highlight the weaknesses of some banks. Otherwise, critics will dismiss the tests as a whitewash. That could undermine one aim of the tests – restoring confidence in the banking system.

The approach spelled out in the Fed document “certainly penalizes those banks that are more involved in traditional banking, which frankly have been performing better in recent months,” said Wayne Abernathy, a former Treasury Department official now with the American Bankers Association.

He said banks’ loan portfolios have lost only about 5 percent of their value so far, while the values of complex securities are down 30 to 40 percent.

The securities are held mostly by banking titans like Citigroup, JP Morgan Chase, Bank of America and Goldman Sachs. Their value is based on the performance of vast pools of underlying loans. A Federal Reserve spokesman declined comment.

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