When you hear the words “stress test”, a treadmill, a heart monitor, and your next physical probably come to mind.  When you hear the words “stress test” in the news these days, it is actually referring to something else-tests the government is currently performing on America’s “big banks” amidst this financial crisis.

What are bank “stress tests?”

Shortly after officially taking office as President, Obama and his administration decided to perform stress tests on the nation’s struggling banks.  According to an online article published by NPR back in February, these stress tests “are a widely used method of figuring out how strong a bank’s balance sheet is – essentially using computer models based on historical data to judge how it would withstand various hypothetical situations.“  Another term used to describe the stress testing process is called “shocking” the bank’s books.

Which banks are undergoing government-imposed stress tests?

In February of 2009, the government mandated that all U.S. banks with assets of more than $100 billion would be required to undergo stress tests. This brings the grand total to 19 banks.  These tests were designed to ensure that banks could survive, and continue lending, even if the following shifts were to happen in the future:  unemployment rising to above 10 percent and home prices falling by an additional 25 percent.

Why are they being conducted?

The Treasury stated that banks will undergo these stress tests to determine whether they “have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.” All of the 19 banks being tested are expected to pass the stress test; however, some banks will be rated higher or lower than others.

Implications of making stress test results public

The White House is still deciding whether or not they will make the results of these stress tests available to the public.  Previously, all of the banks receiving bailout money had been considered equally, preventing the more deeply wounded banks from receiving any negative attention.  The Federal Reserve even announced last week that all results must be kept confidential, as financial results like this are rarely made available to the public.  Nevertheless, some within Obama’s administration believe that results need to be released to confirm the validity of the assessments to the American people.

What if a bank fails the stress test?

As citizens affected by the credit crisis on a daily basis across various aspects of life, it is important to ask yourself what you would do if the bank you bank with failed this government-imposed stress test.  According to Treasury officials, the stress test actually “won’t be “pass or fail,” but a question of what level of capital was adequate.” Either way, these “stress tests” should have little, or no affect on the way you bank.

This past Thursday, Wells Fargo released a surprising first quarter earning report that displayed profits, mirroring what Citi Financial profit reports stated a few weeks ago.  Stocks of Wells Fargo surged to their highest level in 2 months, shooting way past the expectations of financial analysts.  More specifically, Wells Fargo reported that it expects earnings of approximately $3 billion for its first quarter; The Dow rose 246.27, or 3.1 percent, on Thursday to 8,083.38.  According to information released on Forbes.com, “the profit forecast of 55 cents a share is more than double the Street’s consensus estimate.”

You may be wondering how Wells Fargo doing so well amidst the recent credit crisis that America faces?  They have stated that acquiring Wachovia has achieved better results than previously anticipated.  Wachovia has contributed approximately 40 percent of its total revenue, which comes to $20 billion.  Many believe this may be a sign of better times to come for the banking industry, which means better times to come for the people of America.

Wells Fargo’s CEO, John Stumpf, commented that “Our business momentum is strong, and we expect our operating margins to remain at the top of our peer group.”

These profits have sent waves of encouragement throughout Wall Street during an otherwise relatively quiet week; this type of positive news has been rare during these tough economic times.   The hope is that Wells Fargo’s success this first quarter will spill over to other banks as well.  Furthermore, The New York Times reported that all 19 banks would pass federal regulators’ ongoing “stress tests”; the objective of this government-imposed test is to estimate how banks would hold up if the economy were to crash even further.

So what does this mean for consumers with regard to loan financing options?  Wells Fargo earned good fees; simultaneously, low interest rates drove 450,000 customers to either purchase new homes or to refinance existing loans.  Doing so has successfully lowered people’s monthly payments.  As a result of the Wachovia acquisition, along with an increase in the number of mortgage applications, the low amount of borrowing activity is likely to increase.

Furthermore, The Federal Reserve has helped reduce mortgage interest rates by buying lots of the Fannie and Freddie-backed loans packages.  President Obama echoed the widespread enthusiasm, stating that “A lot more people can take advantage” of the refinancing program.  He also urged Americans to find out if they are eligible at the website www.makinghomeaffordable.gov

For the time being it seems that stocks are responding well to Geithner’s plan to rid banks of toxic assets.  The Dow Jones Industrials are up nearly 500 points, a strong indication that not only is morale about the state of the economy on the rise, but the actual economy may be beginning to legitimately heal itself.  Furthermore, a surprising report was released that home sales are beginning to increase.

Let’s take a look at the numbers more closely to gain a better understanding of where this optimism regarding the financial crisis is coming from.  According to the Washington Post, companies like J.P. Morgan Chase and Bank of America climbed more than 18 percent, while Boeing and General Motors also displayed unexpected growth.   The S&P 500’s 7.1% rise is the fourth largest daily advance since the 1930’s, adding to the glimmer of positivity that has been shining since Geithner’s announcement a few weeks ago.

Things are not only looking up here in America in terms of the stock market’s response to Washington’s plan to get the economy back on track; several Asian stock indexes also rose 3% or more.  Malaysia’s main index rose 2.5%, Philippine shares went up 2.5%, Indonesian shares climbed 3.4% and Thailand’s SET added 2%.  The positive effects seem to be spreading throughout the world in the past few weeks.  Though the climbs in these stock markets are only the beginning of what needs to continue, these positive changes in response to Washington’s policies are steps in the right direction.

So what does this positive movement in the stock market mean for everyday Americans?  First, let’s take a look at your 401K.  As a result of the financial crisis, average Americans lost anywhere from 20 to 40% of their 401K.  When stocks are recovering, this inspires confidence that recovery of these funds in the future is possible.  With housing sales beginning to increase, this means that in selected areas, the bottom may have been reached for falling home values.  Perhaps we are beginning to see the positive effects of Obama’s housing plan, as everyday Americans are beginning to get access to much-needed loans again.

This past Monday, Treasury Secretary Timothy Geithner announced this week that the White House plans to clean out toxic assets from banks’ balance sheets.  This is great news, and has been extremely well-received by Wall Street.  So what will this announcement look like in terms of action?  Well, according to Geithner, the administration will team with investors to buy up half a trillion dollars of bad bank assets.  Doing so will ease credit for both consumers and businesses.  Eventually, Geithner commented, when the plan takes full effect, the purchases will grow to $1 trillion.

Think of this plan as the government joining forces with the private sector.  The administration will then purchase individual homes along with mortgage-backed securities as an initial step in the multi-faceted plan.  $100 billion will be taken from the financial rescue funds bailout money, which have already been approved by Congress, to match contributions that private investors have made.  The Federal Reserve will then step in and grant loans to the public-private ventures, along with loan guarantees from the Federal Deposit Insurance Corporation.

The head of the White House Council of Economic Advisors, Christina Romer, commented: “This has never been about helping Wall Street or helping a firm that made mistakes. We’re doing this for ourselves. … It’s absolutely about helping a system so that people can get their student loans, and that families can buy their house and buy their cars, and small businesses can get their loans.”

The Dow Jones Industrial reacted positively to Geithner’s unveiling of the long-term plan, making a 6.8 percent jump-its biggest since October.  Furthermore, this positive reaction and hopeful step towards fixing our current financial crisis gives Timothy Geithner’s roll some much-needed support and credibility as Obama’s newly appointed Treasury Secretary.  In Monday’s Wall Street Journal, Geithner wrote that the new bank program aims to accomplish the following:

“ Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets….The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.”

Here’s to hoping that this positive step in the right direction will continue to inspire confidence across Wall Street-but more importantly, it appears that this plan of action could ultimately make tangible strides towards pulling our economy back up to where it belongs.  When that happens, everyone will reap the benefits.