By David Cho
Washington Post Staff Writer
Wednesday, April 22, 2009
Treasury Secretary Timothy F. Geithner said yesterday that the "ultimate test" for determining which banks can repay government bailout money is whether the entire financial system is capable of offering enough credit to revive the economy.
Geithner's remarks indicate that regulators will require banks to meet high standards to get out from under the government's thumb. Industry and federal officials are bracing for a showdown over this issue beginning Friday when the chief financial officers of 19 of the nation's major banks will be summoned to the Federal Reserve and told the results of the government's "stress tests."
This federal initiative is examining whether the firms have enough capital to continue lending if the economy significantly worsens. Senior administration officials say the tests may show that some banks need to raise more money or take additional government aid.
But the banks say federal bailout money, which requires firms to restrict executive pay and submit to other limits, now carries a stigma. Several of the firms, such as J.P. Morgan Chase and Goldman Sachs, have been lobbying the government to be released from the bailout and have taken steps to repay the money.
Geithner said his primary responsibility is to consider the well-being of the entire financial system, rather than the health of individual companies. The federal government can reject requests from banks that want to repay the money.
"The critical thing we care about is whether the system, as a whole, is in a position where it has the capacity to support the credit that recovery requires," he said, making his first appearance before a congressional oversight panel on the government's financial-rescue program. "That's the ultimate test."
Geithner added that he sees signs of "thawing" in the credit markets and that most banks have more capital than they need. Some market analysts said those comments sparked yesterday's rally in stocks, which had been trading in negative territory before the hearing began. The Dow Jones industrial average ended the day 1.6 percent higher, while the Standard and Poor's 500-stock index, a broader measure, jumped 2.1 percent.
"Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators," Geithner said in his testimony.
Still, even among the positive signs, there are "significant declines" in commercial lending and some consumer loans, such as credit cards, and the cost of borrowing money remains high, he said.
Highlighting these continuing risks to the financial system, the International Monetary Fund yesterday predicted that U.S. financial institutions could lose $2.7 trillion by the time the global credit crisis ends.
Geithner added that the stress tests are looking at not just the overall level of capital, but the type of capital on banks' balance sheets. Of particular concern is whether banks have enough "tangible common equity," a kind of capital that can be raised by selling more stock. These funds are the best cushion for cash-strapped banks in crisis.
In a letter to the oversight panel's chairwoman, Elizabeth Warren, Geithner said that $109.6 billion remains in bailout funds. The Treasury Department has conservatively estimated that firms will repay another $25 billion in the short term. J.P. Morgan and Goldman Sachs combined have received $35 billion in bailout funds.
Some federal officials have said that the government needs such repayments in order to have enough financial firepower to see the nation through the crisis.
"We would welcome it," Geithner said of the repayments. "It helps show progress, it helps underscore the basic points that the institutions of our financial system are in very different circumstances."
But he warned that "the basic objective that's guiding what we do is to make sure the system is working as a whole."