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AP: 'Stress Test' Tougher On Loans Than Toxic Assets

The federal government stress test being applied to check the health of the nation's banks takes a tougher view of banks with a lot of loans on their books than banks saddled with toxic assets, the Associated Press is reporting in an exclusive just rolled out.

According to a Federal Reserve document the AP says it has obtained, banking regulators are using a stress-test methodology that assumes the toxic assets -- such as mortgage-backed securities based on defaulted mortgages -- will lose little more of their value, while conventional loans to consumers and businesses could lose 20 percent of the value going forward, as they fall into default.

It was assumed that the big Wall Street banks would fare worse in the stress test because they hold so many toxic assets and a failure by one of the big banks could drag down many others.

The regional banks were considered healthier because they participated less in the securitization market and held the loans they made.

This is why the stock of the regional banks has performed better than that of the big banks in recent months.

But that turns out to be just the problem: Because their loans are *not* securitized -- meaning the risk has not be spread around -- the banks are directly liable when their loans default.

Many fear the next big financial crisis -- and the thing that will keep the recession going longer -- is a coming wave of commercial and consumer credit defaults, including on credit cards.

The Fed said it will release its stress-test methodology on Friday and the results of the test May 4.

-- Frank Ahrens
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By Frank Ahrens  |  April 21, 2009; 4:28 PM ET
Categories:  The Ticker  | Tags: credit cards, credit default swaps, stress test  
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