Geithner explains stress tests in op-ed

I kind of feel sorry for Tim Geithner. He’s expected to not only master the intricacies of the financial crisis and figure out how to fix it, but to communicate all of that clearly to a general audience. When he slips, the stock market dives and everyone calls for his head.

Like his assignment today: explain the stress-test process in a New York Times op-ed.

After a few hundred words detailing the frozen credit markets and the reluctance of banks to loan, Geithner gets to the tests, the results of which will be released today:

The Federal Reserve marshaled hundreds of supervisors to spend 45 days rigorously reviewing the banks’ detailed loan data. They applied exacting estimates of potential losses over two years, along with conservative estimates of potential earnings over the same period, and compared them with existing reserves and capital. The results were then evaluated against strict minimum capital standards, in terms of both overall capital and tangible common equity.

The effect of this capital assessment will be to help replace uncertainty with transparency. It will provide greater clarity about the resources major banks have to absorb future losses. It will also bring more private capital into the financial system, increasing the capacity for future lending; allow investors to differentiate more clearly among banks; and ultimately make it easier for banks to raise enough private capital to repay the money they have already received from the government.

The test results will indicate that some banks need to raise additional capital to provide a stronger foundation of resources over and above their current capital ratios. These banks have a range of options to raise capital over six months, including new common equity offerings and the conversion of other forms of capital into common equity. As part of this process, banks will continue to restructure, selling non-core businesses to raise capital. Indeed, we have already seen banks, spurred on by the stress test, take significant steps in the first quarter to raise capital, sell assets and strengthen their capital positions. Over time, our financial system should emerge stronger and less prone to excess.

Leaked results indicate that 10 of the 19 top banks need more capital. Bank of America needs a staggering $34 billion; Citigrop needs “just” $5 billion.

Geithner indicated that banks can seek capital through the Treasury Capital Assistance Program, but he clearly expects some sacrifice on the part of banks as well:

As part of this process, banks will continue to restructure, selling non-core businesses to raise capital. Indeed, we have already seen banks, spurred on by the stress test, take significant steps in the first quarter to raise capital, sell assets and strengthen their capital positions. Over time, our financial system should emerge stronger and less prone to excess.