US unveils stress tests for major banks

The US Treasury Department released details about the "stress tests" that are being applied under the new Capital Assistance Programme. The move is aimed at ascertaining the capacity of banks with more than US$100bn in assets to weather a downturn under an adverse scenario in which unemployment rises above 10% next year and house prices fall by 27% over two years. Financial companies will have to raise more funds from the government if needed. The state may end up owning majority stakes in some banks. Officials, however, played down talk of full bank nationalisation. Sheila Bair, the head of the Federal Deposit Insurance Corporation (FDIC), said there was ambiguity in the word. Federal Reserve chairman Ben Bernanke too echoed Bair's views, sending bank shares higher this week on Wall Street.

Separately, US President Barack Obama said that financial institutions would face greater government oversight in the wake of the global economic crisis, and that trust in the system could only be rebuilt with transparency and openness. "This financial crisis was not inevitable," he said. "Here in Washington, our regulations lagged behind changes in our markets, and too often regulators failed to use the authority that they had to protect consumers, markets and the economy."