[Update 1 includes added details on the COP’s report.] As some of the major US banks awaited approval to repay government aid through the Troubled Asset Relief Program (TARP), one regulatory oversight panel is pushing for another round of stress tests to account for already worsening economic conditions. A group of 10 of the largest US banks received permission today to repurchase $68bn in stocks issued to the federal government through the TARP. The authorization comes after some of the largest US banks submitted capital-raising plans Monday to meet capital requirements of the Supervisory Capital Assessment Program (SCAP). Only banks that could prove their ability to issue debt and raise sufficient capital outside of government aid received approval from their regulators to return government funds. “These repayments are an encouraging sign of financial repair, but we still have work to do,” says US Treasury Department secretary Tim Geithner in a statement announcing the repayment approvals. Moments after the announcement, US Bancorp (USB) touted its approval to redeem $6.6bn of preferred stock issued to the Treasury. “The repayment of the TARP capital will provide US Bancorp with both independence and strategic flexibility, and we fully expect to continue to vigorously offer lending opportunities to our credit-worthy consumer, small business, corporate and institutional customers,” says CEO Richard Davis. “Further, the funds we are now returning to the US Treasury can be used to support other economic recovery efforts.” Despite the good news for banks looking to return government funds, the Congressional Oversight Panel (COP) issued a report today warning banks may need a second round of stress tests if economic conditions worsen beyond what the SCAP originally projected. Part of the problem with the first round of tests, the panel says, was the lack of detail around how exactly they were executed. “[T]here remain unanswered questions about the details of the stress tests,” COP officials say in the report. “Without this information, it is not possible for anyone to replicate the tests to determine how robust they are or to vary the assumptions to see whether different projections might yield very different results.” But beyond a lack of transparency, the few details provided are disconcerting, according to the COP. The national unemployment rate, for example, climbed to 9.4% in May and the COP estimates that further increases will likely top the full-year average over the 8.9% assumed in the more adverse scenario of the SCAP, necessitating a new round of tests to ensure banks are sufficiently capitalized. Tests should also be repeated as long as banks hold large amounts of toxic assets, according to the COP. The panel also recommends that banks should run internal tests between formal tests and share the results with regulators. Regulators should be able to conduct stress tests at their discretion when doing so would promote a healthy banking system, the panel says. A statement in the report also speaks to the issue of asset-purchasing plans like the Public-Private Investment Program that aim to clear toxic — or “legacy” — loans off banks’ balance sheets. The programs have seen a slow start due in part to the difficulty around pricing the assets and loans, a problem COP points out in its report. “Finally, the panel cautions that banks should not be forced into counterproductive ‘fire sales’ of assets that will ultimately require the investment of even more taxpayer money,” officials say. “The need for strengthening the banks through capital increases must be tempered by sufficient flexibility to permit the banks to realize full value for their assets.” Read the COP’s report. Write to Diana Golobay. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
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