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The Fate of the Nation's Banks

The ""International Monetary Fund"":http://www.imf.org/external/pubs/ft/survey/so/2009/RES042109C.htm (IMF) released a report this week that estimates U.S. banks will lose another $550 billion in the value of their holdings over the next two years as a result of the financial crisis. Lenders here in the states had already reported $510 billion in write-downs by the end of 2008, as mortgage assets and securities slipped headlong into the downturn.
To better assess the health of banks here at home, the administration has just completed its bank stress tests on the nation's 19 largest lenders. Nearly a full two months after the exams were announced, the institution's executives met with regulators on Friday to learn how they fared. The Federal Reserve is sharing with the banks how much capital regulators have determined each might need to raise to ensure it is appropriately capitalized and can continue lending if the economy proves weaker than expected.
The stress test results are not planned for public release until May 4, and the banks involved will have until that time to plead their case to regulators if they disagree with the findings. The Fed has stressed that just because a bank is told it needs an additional capital buffer as a result of regulators' analysis, it should not be interpreted to mean the company is insolvent or inviable.
The tests were conducted by more than 150 examiners, supervisors, and economists from the Federal Reserve, Office of the Comptroller of the Currency (OCC), and FDIC. The ""methodology used"":http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090424a1.pdf involved stringent analysis of loss estimates across a wide range of institutional assets, including residential mortgages, investment portfolios, trading-related exposure, complex securities products, and other revenue opportunities. The banks were asked to submit their own loss projections, which were compared to the other firms' numbers as well as the independent benchmarks developed by regulators.
Those banks that are concluded to need more money will first need to turn to the private sector for it. If they aren't able to secure what they need from private investors, then they can request another cash injection from the government or convert the government's existing preferred stock into common stock, a method already employed by Citigroup to rustle up more cash.
FDIC Chairman Sheila Bair recently proposed a new idea to lawmakers that might prevent the federal government from having to take such steps by ensuring the nation's financial system is not so dependent on the health of a small number of institutions. Bair says regulators should reduce systemic risk by limiting the size of banks and preventing lenders from becoming ""too big to fail.""
According to members of the House Financial Services Committee who were present when Bair made the suggestion, there was a ""positive response"" from lawmakers when they heard the idea.
U.S. Treasury Secretary Timothy Geithner hosted his first meeting of a weekend-long agenda with the world's top financial authorities in Washington on Friday, to discuss what he called ""the deepest and most widespread economic downturn and financial stress witnessed in decades.""
Following the initial meeting with G-7 finance ministers and central bank governors, Geithner ""issued a statement"":http://www.treasury.gov/press/releases/tg101.htm in which he said, ""Recent data suggest that the pace of decline in our economies has slowed and some signs of stabilization are emerging. Economic activity should begin to recover later this year amid a continued weak outlook, and downside risks persist.""
Looking at the international financial marketplace, IMF said in its report this week that banks and other financial institutions around the world are expected to face aggregate losses of $4.05 trillion as a result of the global economic crisis. Of this amount, $2.7 trillion is from loans and assets originating in the United States. That projection is up from the fund's $2.2 trillion estimate in January, and $1.4 trillion last October.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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