As the Treasury began a series of stress tests Wednesday to gauge the soundness of the nation's biggest banks, Treasury Secretary Timothy Geithner said he wants to ensure that they will have enough money to "withstand a more challenging economic environment."
This crisis has been going on for at least a year and a half, and the government has had regulators embedded in the country's biggest banks.
Geithner tells NPR's Adam Davidson that the stress tests are an integral part of what banks and supervisors do.
"What we want to do is to bring a more realistic, a more conservative, a more consistent, forward-looking assessment so that we are confident that these institutions are going to have the resources necessary to withstand a more challenging economic environment," he says. "And to do that we're gong to make sure they have support from the government — in terms of capital from the government — where that is necessary."
On Wednesday, the government began testing 19 of the biggest financial institutions in the U.S., including Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase, to determine whether they'll have enough capital to survive for the next two years — an indication of whether the banks can continue to lend money.
Senior government officials said the stress tests will check to see how banks would fare if unemployment rose above 10 percent and if the decline in home prices reached 30 percent over the next two years. Those are worse than mainstream forecasts, but possible scenarios.
Federal Reserve Chairman Ben Bernanke said on Wednesday that if the results of a stress test show that banks need additional capital, they will have six months to raise money from the private sector.
If they're unsuccessful, the banks will be able to convert money the government has already injected into them into common stock, a more powerful form of capital than the preferred shares the government now owns. They could also request additional funds from the $700 billion Troubled Asset Relief Program. Officials said the government will provide as much money as necessary to restore confidence in the banks and allow them to increase their lending.
One of the big questions when it comes to bailing out the banks is whether taxpayers will have to foot the bill.
"What we're trying to do is to make sure that we solve the crisis at least cost to the taxpayer with the best gain in terms of getting credit flowing again and the system stronger for the future," Geithner says.
Outside the government, there is a vigorous debate about nationalization. A growing number of people think this is absolutely necessary because some banks just aren't healthy enough to survive on their own unless the government steps in to take them over.
Geithner refrained from using the word "nationalization" in his interview with NPR. He says it's not the right strategy for the country.
NPR's John Ydstie and The Associated Press contributed to this report.