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Fed Reveals Rules For Bank Stress Tests

The Federal Reserve released details Friday about how it evaluated whether 19 of the nation's largest banks would be viable if the economy worsens.

Those subjected to these so-called "stress tests" included all bank holding companies with assets totaling $100 billion at the end of 2008. Taken together, those institutions hold two-thirds of the assets and more than half the loans in the country's banking system.

Teams of government representatives from the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. reviewed the banks' financial data. Banks were briefed on how they held up in the tests and allowed to dispute the results, but the specific results of their performance won't be revealed until May 4.

The stress tests, announced two months ago, have set off a firestorm of debate over whether the government is effectively picking winners and losers in the industry, and has led to speculation that regulators may require banks to set aside more capital to cover potential losses.

How The Tests Worked

According to the 21-page report released Friday, each firm was asked to provide financial data on its loans, securities and trades, then the government essentially played a game of "what if." It tested how much the banks would lose — and whether they had enough of a financial cushion — if either of two different macroeconomic scenarios came to pass.

The information provided by the banks included details about their mortgage portfolios — from geographic location to home equity lines of credit and the credit score of the borrowers of their loans. Similar details about the banks' industrial loans, their commercial real estate loans and credit card portfolios — including data about risk, payment rates and credit scores — were also provided.

Teams of reviewers vetted all this information, sometimes requesting additional information from the banks. Then, these results were compared across all the banks.