The methodology "certainly penalizes those banks that are more involved in traditional banking, which frankly have been performing better in recent months," said Wayne Abernathy, a former Treasury Department official now with the American Bankers Association.
He said banks' loan portfolios have lost only about 5 percent of their value so far, whereas the value of complex securities are down 30 to 40 percent.
A spokesman for the Federal Reserve would not comment. A Treasury Department spokesman referred questions to the Fed.
Assuming that this is what will occur, why is the Fed harder on regional banks than national ones?
Lets ASSUME that the national banks, if the test wasn't skewed in their favor, are bankrupt. The US government would basically have to dissolve the top 10+ national banks. This would likely start some sort of panic and collapse, possibly globally. Also the government would immediately need additional funds to cover the immediate losses from these national banks. This would likely spike interest rates, causing the death spiral in interest rates I blogged about previously.
By being harder on the the regional banks, the more SOLVENT banks, these banks can be bankrupted by the US government. The assets, which have more value than the national banks, can then be absorbed by the national banks to prop them up.
This will "kick the can" down the road once again for the financial problems by giving the banks with greater issues the assets (deposits) they need to continue to operate.
The end result will be the banks determined "too big to fail" to have yet even MORE assets, making them 2x too big to fail. This will be continued consolidation of power by the US government. These national banks will be beholden to the US government because of TARP money already taken.
If this transpires, we are witnessing the nationalization of the US financial system. The US government will become not the lender of last resort, but THE lender, period.
In any event, I assume no one reading this blog will write their congressman, join a protest, etc. If the banks consolidate as described, it continues to bolster the view of buying resource stocks as these money games will not lead to a bright future for the US Dollar.