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Lenders Stress Over Test Results

Some very large banks are clashing with the Federal Reserve over how much detail the central bank will reveal about them when it releases the results of its latest stress test.

The 19 biggest U.S. banks in January submitted reams of data in response to regulators' questions, outlining how they would perform in a severe downturn. Now, citing competitive concerns, bankers are pressing the Fed to limit its release of information—expected as early as next week—to what was published after the first test of big banks in 2009.

Three years ago, as the financial crisis was abating, the Fed published potential loan losses and how much capital each institution would need to raise to absorb them. This time around, the Fed has pledged to release a wider array of information, including annual revenue and net income under a so-called stress scenario in which the economy would contract and unemployment would rise sharply.

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The Clearing House Association, a lobbying group owned by units of companies such as J.P. Morgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., warned in a letter this month to the Fed that making the additional information public "could have unanticipated and potentially unwarranted and negative consequences to covered companies and U.S. financial markets."

Government officials aren't backing down from their plan to publish detailed projections of how the biggest lenders would fare in a steep economic downturn lasting two years. Regulators view full disclosure as critical to assuaging investor concerns about banks' capacity to withstand a market shock or economic setback.

"The disclosure of stress-test results allows investors and other counterparties to better understand the profiles of each institution," Fed Governor Daniel Tarullo, the central bank's lead official on supervisory matters, said in a speech last November.

The dispute is the latest flashpoint between big banks and their overseers. In the financial crisis, U.S. regulators forced banks to slash their dividends and curtail stock buybacks in exchange for billions of dollars in government aid. More recently, the sides have butted heads over the rollout of new rules tied to the Dodd-Frank financial-overhaul law, such as the so-called Volcker Rule that aims to limit bank risk taking.

Fed officials are assuring banks they won't release data that rivals could mine for clues to future acquisitions or other moves. In one concession, the Fed told banks it doesn't intend to break out projected losses on a quarterly basis.

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The haggling between the government and the banks could escalate in the coming days. Before releasing the final results, the Fed is likely to provide banks with preliminary figures and an opportunity to raise concerns with the central bank. When the Fed gave banks a sneak peek at results in 2009, some institutions were able to persuade regulators to scale back by billions of dollars the sums they were ordered to raise.

The biggest U.S. lenders have been raising capital over the past year, and most institutions are expected to receive approval for dividend increases or share buybacks. Bankers believe those moves will boost their appeal with investors at a time when many financial stocks are trading below book value, a measure of net worth.

Even so, regulators are walking a fine line with the latest test. If banks look ill-equipped, markets could be spooked, adding to the stress on firms already struggling with the low interest rates, soft growth and new rules that led banking-industry revenue to fall last year for just the second time in 74 years. Shares of the biggest banks fell as much as 58% in 2011 amid questions about the industry's profit outlook and the impact of the European debt crisis.

If regulators are viewed as too pliant, the tests will fall short of their basic confidence-building purpose, possibly undermining a market recovery that pushed the Dow Jones Industrial Average above 13000 for the first time in four years and pushed the KBW index of commercial bank stocks up 16%. Similar tests administered by regulators in the European Union were denounced for giving passing grades to some lenders that later required taxpayer bailouts.

Soon after the Fed said last November that the results would be made public, the debate began about how much the Fed should disclose.

More than a dozen bank holding companies subject to the stress tests—all with at least $50 billion in assets—met with Federal Reserve staff in late December to discuss what the Fed might say, according to disclosures on the Fed's website. The meetings were at the Fed's invitation, and Fed staff said they were still considering the timing, scope and level of detail of the data they will publish, according to a summary of the meetings posted by the Fed.

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Officials from Metlife Inc., Bank of America, J.P. Morgan Chase, Goldman Sachs Group Inc. and other financial institutions also discussed with Fed staff the implications, including competitive issues, of making the results public.

Bankers say it is unfair for the Fed to release more information than it did during the initial 2009 stress tests.

The reason: The Fed is still in the middle of writing a rule establishing what information it will make public in future stress tests, as required by the Dodd-Frank financial law passed in 2010.

Last year the Fed didn't make any aspect of its stress test public, leaving disclosure to institutions, many of which then released some results. Some bankers warn they may put out their own figures if they disagree with the Fed's calculations.

"They could just publish something that has nothing to do with reality," said one top executive at a major bank.

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