Bank Tests Yield Early Progress

The government has tried to manage public expectations about the tests by arguing that the banks will be fine while acknowledging that they have big problems. Financial analysts said the government's efforts have calmed the markets.

Bank of America's share price has climbed by 129 percent since the tests were launched. Wells Fargo is up 78 percent, even though both companies are likely to be ordered by the government to raise additional capital. Even Citigroup, the most troubled of the large banks, has risen 27 percent.

"I think the stress test itself really spooked the system, and I think the government did a lot of damage control over the stress tests to kind of tell people that it's going to be okay," said Paul Miller, a financial analyst with FBR Capital Markets.

Miller said recent events have helped the government's case, as the largest banks posted strong first-quarter earnings goosed by a combination of diminished competition on Wall Street and the flow of cheap loans from the Federal Reserve.

Still, Miller cautioned that the stress-test process may not be enough to repair problems at the weakest firms. Senior administration officials said all 19 tested banks probably could survive the downturn without more capital by cutting back on lending and hoarding their resources. By forcing the banks to accept more capital, the government hopes to convince them that they are safe in increasing lending. The point of the stress tests is not to rescue banks from failure, they said. It is to rescue the economy.

The government hopes the new capital will come mostly from private investors. But many banks are likely to receive additional support from the government. The Treasury has allowed banks to exchange common shares for the government's preferred shares, eliminating required dividend payments.

Banks that do not require additional capital are likely to push for permission to repay the government's existing investments.

The government has allowed 11 smaller banks to repay the money, but it has not yet allowed any larger banks to do so. Some government officials said banks should not be allowed to repay the Treasury while continuing to tap other sources of aid, such as a Federal Deposit Insurance Corp. program that allows banks to issue debt at lower interest rates by guaranteeing repayment.

A senior government official said Monday that companies would be allowed to repay federal investments only once they demonstrate an ability to issue debt outside the shelter of the FDIC's program. The government plans to impose other conditions on repayment, as well, the official said. The Treasury may announce the details as early as today.

J.P. Morgan, Goldman Sachs and BB&T have successfully issued debt in recent weeks without a government guarantee.