WASHINGTON (AP) — The Obama administration is getting ready to conduct "stress tests" on the nation's biggest banks to judge whether they can hold up if the recession were to worsen.
Banking regulators plan to scrutinize the financial conditions of Citigroup Inc., Bank of America Corp. and more than a dozen other institutions that have received billions from the Treasury Department's $700 billion bailout pot.
The tests, expected to start on Wednesday, will help regulators decide whether the banks have sufficient capital — and the right mix of it — to withstand any additional shocks to the economy over the next two years.
The tests also will help regulators decide whether the banks may need additional assistance so that they can carry out the critical mission of boosting lending to customers, a key ingredient to the economic turnaround.
Federal Reserve Chairman Ben Bernanke returns to Capitol Hill Wednesday for the second straight day. This time he'll appear before the House Financial Services Committee where's he likely to get tough questions about the government's controversial bank-rescue efforts.
Testifying before a Senate panel on Tuesday, Bernanke calmed investor fears that the government was heading down a path of nationalizing troubled banks and Wall Street rallied a day after hitting 12-year lows.
"We've always worked with banks to make sure that they're healthy and stable, and we're going to work with them. I don't see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize the bank when it just isn't necessary," Bernanke told senators on Tuesday.
"The outcome of the stress test is not going to be fail or pass," added Bernanke, whose agency is the primary regulator for many of the country's largest banks. "The outcome of the stress test is, how much capital does this bank need in order to meet the credit needs of borrowers in our economy?"
Critics worry the government's rescue actions have the potential to put ever-more taxpayers' dollars at risk and encourage "moral hazard," where companies feel more comfortable making high-stakes gambles because the government will bail them out.
It's all troubling to Stan Eden, 48, of Miami.
"If you can't perform, you move to the side," Eden said of companies seeking bailouts. "All the greed and deceit has overtaken common sense in the decision-making process in the country."
On the economic front, Bernanke told lawmakers that the economy was suffering through a "severe contraction." But he planted a seed of hope that the recession might end this year if the government managed to prop up the shaky banking system.
Speaking to Congress Tuesday evening, President Barack Obama said more money would be needed to rescue troubled banks beyond the $700 billion already committed last year. Saying he understands bank bailouts are unpopular, he insisted it was the only way to get credit moving again to households and businesses. He also called on Congress to move quickly on legislation to overhaul regulations on the nation's financial markets.
A report out Wednesday from the National Association of Realtors is expected to show the sales of previously owned homes nudged up in January. Economists are predicting that buyers snapped up foreclosed and other properties at bargain prices, which pushed up sales. If that happens, it could be a sign that home sales are inching toward a long-awaited bottom.
Still, home prices are expected to keep falling this year. That has whittled away Americans' single-biggest asset and figured prominently in consumers' decisions to cut back spending, which has sorely hurt the economy.
Bernanke says the economy is likely to keep shrinking in the first six months of this year after posting its worst slide in a quarter-century at the end of 2008.
However, the Fed chief is hopeful the recession will end this year, but there were significant risks to that forecast. Any economic turnaround will hinge on the success of the Fed and the Obama administration in getting credit and financial markets to operate more normally again.
The behavior of consumers also plays a key role whether a recovery will take hold in 2010, as Bernanke hopes.
Consumer confidence, though, went into a free fall in February, sinking to new lows, according to a report out Tuesday. Vanishing jobs and nest eggs factored into the drop.
"I'm faithful there's a light at the end of the tunnel, but I feel like we're not seeing the light yet," said Dan Walpole, 28, an elementary school teacher in Rochester, N.Y.
Associated Press writers Matt Sedensky in Florida and Ben Dobbin in New York contributed to this report.
Copyright 2009 The Associated Press.