Alert: Stress Test White Paper Today

Bank regulators will today explain in a white paper the methodology used in stress tests to assess the health of the top 19 banks

The white paper will explain the treatment of different types of asset such as first and second lien mortgages, commercial real estate, credit cards and securities.

FT is reporting that:

US banks could be forced to hold more equity than initially expected after it emerged that “stress tests” organised by regulators take into account risks not commonly understood to be included in the assessment.

In addition to looking at potential losses on loans and securities, bank examiners are looking at so-called “counterparty risk” on derivative contracts – the chance that the party on the other end of a derivatives deal might default, depriving the bank of a payment that is due.

The more equity called for as a result of the stress test the more likely banks will be forced to sell such products as positions in private equity partnerships, and sell them into the waiting arms of inside operators such as Carlyle Group.