U.S. launches stress test for major banks

The announcement held out hope that Obama's plan, criticised in many quarters as short on specifics so far, would get the teeth needed to provide a genuine fix for the ailing U.S. financial sector.

The tests would be used to determine if banks with assets of more than $100 billion needed new capital injections and other government help under the rescue plan, which has dominated the presidents first weeks in office.

With Obama set to send his first budget proposal to the U.S. Congress later on Thursday, the announcement of the tests appeared to provide little bounce for Asian stock markets and did not prevent another drop in U.S. shares.

The president said Wednesday that financial institutions would face greater government oversight in the wake of the global economic crisis, and that trust in the system could only be rebuilt with transparency and openness.

"This financial crisis was not inevitable," he said.

"Here in Washington, our regulations lagged behind changes in our markets, and too often regulators failed to use the authority that they had to protect consumers, markets and the economy."

As part of Obama's massive bailout package, the government injects capital into banks that need it, in exchange for preferred shares that pay a 9 percent dividend and can be converted to common stock.

But some analysts say that this will effectively lead to nationalizing key banks -- something Federal Reserve chairman Ben Bernanke stressed the government wanted to avoid.

"I dont think we want to do that, and I dont think we need to do that," he said. "I think we have the tools, short of those draconian measures, to make sure the banks return to viability and to extending credit to the public."

The crisis was sparked more than a year ago by so-called subprime loans in the United States made to borrowers who were less than fully credit-worthy.

The loans were also resold as complicated investment instruments to banks, institutions and private investors around the world. Once large-scale defaults on those loans hit, the impact was felt around the globe.

"Wall Street wrongly presumed markets would continuously rise and traded in complex financial products without fully evaluating their risks," Obama said.

The resulting drying up of credit, with banks unable or unwilling to make the kinds of large-scale lending needed to keep the global economy ticking over, has helped to deepen the effects of the worldwide economic slowdown.

Governments around the world have been trying stimulus packages and other measures to try to revive their economies.

But there has been a seeming unending stream of gloomy news for months, with major economies tipping into outright recession.

Japan, the world's second-largest economy after the United States, announced this week that exports plunged more than 45 percent -- the worst such reading since record-keeping began 30 years ago.

France said unemployment made the biggest ever one-month jump in January, while French bank Natixis announced a loss of 2.8 billion euros ($3.6 billion) for 2008.

Hong Kong shares were down 0.8 in morning trade on Thursday, while Japan shares ended slightly lower, giving up early gains due to what dealers said was market worry about the rapid deteriorating situation.

The crisis claimed another scalp on Thursday as beleagured Swiss bank UBS, which has lost billions during the crisis, said CEO Marcel Rohner had resigned with immediate effect.