Disclosing Bank “Stress Test” Numbers: Good Way To Cause Panic

The government is close to having the results of its “stress tests” of large US banks. It has taken the financial firms’ balance sheets and set up models for what will happen if the economy worsens. Any bank that looks weak under the circumstance of the trials will be asked to raise capital. In the current credit environment, that many be nearly impossible to do.

The Administration has been asking banks not to divulge data on the testing when they put out their first quarter numbers. That stance undercuts normal disclosure rules for public companies which requires them to give out “material” information about their businesses. How each firm performed in the government trials would certainly qualify.

Looking at the balancing act between disclosure and the concern that banks that get poor grade for the “stress test” will face sell-offs in their stocks, the government has decided to lean toward telling the public the results of its work. Accoridng to The New York Times, “The administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumored to be weakest.” That is an odd position to take. The banks which are at the bottom of the list will almost certainly face panicked shareholders.

The government is damned if it does not release the data and it is damned if it does. Over the last year, the stocks of the largest banks have largely moved up and down in concert with one another. Once Wall St. perceives some of the firms as being significantly troubled, the sell-offs in their stocks will be rapid and damaging. Low share prices will mean more dilution when capital has to be raised. The US banking system will be broken into two pieces.

Public perception of the firms that fall into the bucket of the weak may not recover from the disclosures. And, the whole process will inevitably raise the question of what will be done to the most troubled banks. The specter of nationalization is likely to return.

Douglas A. McIntyre