Bank Stress Tests: 'This Whole Process Has Been a Fiasco'

The stress tests also have the capacity to create another obstacle for Washington’s crisis management efforts—emerging legislation meant to give the federal government new powers to take over and, if necessary, shut down so-called “too-big-to-fail” institutions.

Government efforts dating back to the Bush administration have added to the group of big banks through shutgun marriages, creating rivals to Citigroup , which was once in a league of its own.

Wells Fargo , Bank of America and JPMorgan Chase have all grown enormously through acquisitions.

Many expect the stress tests to yield even further consolidation, as the smallest of the 19 banks struggle to raise capital.

List of Stress Test Companies:

“I find it kind of ironic when everybody talks about breaking up these big guys that the consolidation process is going to continue,” said Ely.

Ely says two to four of the smaller banks in the group—which all have assets over $100 billion—could be consumed by the end of the year.

“The ones that are good are going to buy their way out,” says Gerald O’Driscoll, a former Fed official who also worked at Citigroup.

JPMorgan Chase boss Jamie Dimon recently raised the possibility of additional acquisitions, having already absorbed Bear Stearns and Washington Mutual earlier in the crisis.

The too-big-too-fail legislation, which will be folded into a broader regulatory overhaul package, has broad support, from Congress to the White House and has grown more urgent, as the government has been in the embarrassing position of repeatedly providing capita to big firms such as Bank of America, Citigroup and AIG .

“Some institutions are too big to exist because they are too interconnected,” Sen. Richard Shelby (R-Ala.) told CNBC. “The regulators can't regulate them.”

Some say the resolution authority will go so far as to empower the regular in charge to judge a banking industry merger’s potential threat to the system.

“Does this regulator have the ability veto mergers that would create a bank that is too big to fail,” asks Lawrence White, a former regulator and White Hose economist now at NYU’s Stern School of Business. “A lot of this has to be for the future so we never go through this again.”

The trend toward bigger banks is even more worrisome to some analysts because authorities have typically allowed the biggest banks to operate with the smallest capital cushions, which hardly jibes with the purpose of the stress tests.

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“We don't need more concentration in banking and ever larger firms,” says former FDIC Chairman William Isaac.

White, Glauber and others say its very likely their government will be forced to intervene and help again, regardless of the stress test results, whether it's more bailout capital or regulatory forbearance.

“I think they do have to go back to the well, “says Robert Glauber.

© 2012 CNBC.com

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