It was in the month of February this year that the federal bank regulatory agencies in the US announced that they would conduct a forward-looking economic assessment of large US banks as part of the Capital Assistance Program (CAP). A core element of the US administration's Financial Stability Plan, the CAP, as the US Treasury White Paper on the program puts it, comprises two objectives: to make a "forward-looking capital assessment to determine whether any of the major US banking organizations needs to establish an additional capital buffer during this period of heightened uncertainty"; and to ensure that a Qualifying Financial Institution (QFI) eligible under the CAP has access to "contingent common equity provided by the US government as a bridge to private capital in the future." This is done to ensure that the US banking institutions have enough capital in their hands to perform their economically vital role of creditors in the financial system so as to stave off further economic gloom and doom.

Bank stress tests

The aim of this supervisory capital assessment, also popularly known as `bank stress tests,' is to ensure that the nation's largest banking institutions have sufficient capital as a cushion against future shocks as well as to lend to creditworthy borrowers and that its depositors and lenders get paid even if the banks run into trouble. This, the administration hopes, will help restore public and investor confidence in the strength and viability of the financial system of the nation.

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