The Treasury determined that confidence could best be restored by making additional capital available to banks that were unable to raise from private sources the amounts necessary for them to continue to function as effective financial intermediaries even if economic conditions worsened appreciably.
To evaluate how much capital individual institutions might require, U.S. bank supervisors, led by the Federal Reserve, undertook a stringent, forward-looking assessment of prospective losses and revenues – a stress test – for the 19 largest U.S. banks. Using TARP funds, the Treasury established the Capital Assistance Program (CAP) to provide any needed capital. Let me summarize the mechanics of the stress tests.