Outside editorial: Stress tests: Tell it like it is

Posted: Wednesday, April 29, 2009

While the general methods used to evaluate the nation's largest banks were released last Friday, the "stress test" results will not be announced until May 4, and even then it is still not clear what information will be shared. The policy should be: as much as possible.

Uncertainty about the financial strength of U.S. banks is one of the factors keeping the banking sector near-frozen. Banks don't want to lend, investors don't want to buy, and consumers don't want to spend while they're waiting for another shoe to drop. The antidote is information. Too often, however, information has been reaching the public in dribs and drabs and through back channels, allowing half-truths and rumors to sweep through the markets.

There are risks to full disclosure in the highly complex process of stabilizing the banking sector. If the news about the health of the banks is bad, it could lead to a further freezing of the system or to bank runs. But much of the information inevitably will make its way into the public domain anyway; no bank that does well on the stress tests is going to keep that fact under wraps for long. Better to pull the band-aid off fast and share the information as straightforwardly as possible.

It is also quite possible that some banks will need more money - either in light of the stress test results or if the downturn persists. The International Monetary Fund predicts that U.S. banks face $550 billion in further writedowns, and it is clear that the banking sector cannot yet stand on its own two feet. Efforts to help have been complicated by the differing priorities of the Treasury and the Federal Reserve, which are focused on using whatever means are necessary to get the banking sector going again, and Congress, which has been on the receiving end of a backlash from voters who are not interested in footing the massive bill.

As a result, Treasury Secretary Timothy F. Geithner is juggling Troubled Assets Relief Program funds to free up more money, and the Fed is stepping into uncharted territory to help with fiscal policy. If additional funds are needed in the coming months and the Obama administration can articulate a clear plan, Congress needs to be willing to authorize the money.

The administration has promised high levels of openness regarding its economic recovery efforts. That transparency may be easier to achieve with a subject such as stimulus spending than with the more-complex banking plan, but President Obama is a talented communicator of complex topics. He should continue to make the case to the public as to why supplying sufficient funding to the banking sector is necessary to help Main Street, and the public will have to be prepared to hear the bad news along with the good.

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