"It appears 'too big to fail' is a fundamental philosophy," said Mark Williams, a finance professor at Boston University and former Fed examiner.
Fed officials told reporters that all 19 banks will be required to keep an extra buffer of capital reserves beyond what is required now in case losses continue to mount. That means some banks will likely have to raise additional cash.
But the Fed stressed in a statement that a bank's need for more capital reserves to meet the requirements should not be considered a measure of the "current solvency or viability of the firm."
Senior Fed officials also told reporters that regulators will keep a close eye on banks to make sure they have adequate capital to withstand further losses on mortgages and other bad assets as the recession drags on.
The tests of the 19 financial firms, which hold half the loans in the American banking system, are a centerpiece of the Obama administration's financial rescue plan. They were intended to boost confidence in the banking system by giving investors signals about the relative strength of the nation's largest financial firms.
The Fed is also using the results to determine which firms need to raise more money or take other action to strengthen their positions.
The government plans to announce the results of the tests May 4. By law, the banks cannot publicize the results without the government's permission, and the Fed itself offered little new information Friday. But Wall Street buzzed with anticipation, and most financial stocks rose. The Dow Jones industrial average added more than 119 points to close at 8,076.
In New York, Gary Cohn, the president of Goldman Sachs, met with Fed officials inside the iron-barred Federal Reserve Bank of New York, a neo-Florentine fortress that sits atop the world's largest gold repository.
Hours later, John Mack, the CEO of Morgan Stanley, arrived in a silver sedan with dark-tinted windows, showed his identification to security and entered the building. He left about 45 minutes later.
Critics remained concerned that the tests have had the opposite effect of what the government intended
- creating uncertainty that feeds market instability.
"I really don't think this is going to add transparency to the system," said Linda Allen, a finance professor at Baruch College. She said the tests are similar to bank examinations that are done regularly to ensure banks have enough money to absorb further losses.
In the tests, the Fed put banks through two hypothetical scenarios for what might happen to the economy.
One scenario reflects forecasters' current expectations about the recession. It assumes unemployment will reach 8.8 percent in 2010 and house prices will decline by 14 percent this year. The second imagines a worse-than-expected downturn: Unemployment would hit 10.3 percent and house prices would drop 22 percent.
Recent economic indicators suggest the economy is approaching the more severe of the two, said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co.
