What Does A Bank "Stress Test" Entail?

It's the toughest test the nation's 19 largest banks will ever take.

The stress test demands that banks imagine the worst possible economic news, a so-called "stress scenario," and then calculate if they've got the capital reserves to cover losses. CBS News correspondent Wyatt Andrews reports.

The key questions on the stress test?

What if unemployment rises to 10.3 percent? What if home prices plunge 22 percent? And what if overall economic growth drops to negative 3.3 percent?

Most important under these conditions is what will happen to the banks' balance sheets? What does the bank lose from increased defaults on mortgages, auto loans and credit cards?

The results will reveal how much more money the banks really need, probably from taxpayers, to stay solvent and keep lending.

Ed Yingling is the CEO and president of the American Bankers Association. Yingling said, "They want to see well, if things get terrible and last a long time, will we need extra capital as an insurance policy?"

What does it all mean? For taxpayers, it means another draw-down of bailout funds Congress passed last October.

What does it mean for investors?

Ironically the stress tests - even by revealing a bank's true worth - will signal to Wall Street the government's commitment to keep banks afloat.

"Hopefully what it will mean for Wall Street investors is that they will have more confidence," Yingling said.

Most important, what does this mean for lending?

Any of the 19 banks taking new bailout funds must agree to lend more than before, "to meet the credit needs of their customers, even in a stressed scenario," said Bernanke in a Capitol Hill hearing.

But there are two big things treasury officials don't know for certain.

They don't know whether, instead of instilling confidence, they might actually undermine confidence in banks that fail the test.

And they don't know if the remaining $350 billion in bailout funds will cover what the 19 banks really need.

  • Wyatt Andrews

    Wyatt Andrews is a CBS News National Correspondent based in Washington D.C. He is responsible for tracking trends in politics, health care, energy, the environment and foreign affairs.