FORTUNE — The Federal Reserve may not be satisfied with some of the results of the annual bank stress tests.
The first indication of how the banks did on those tests is set to be released on Thursday, March 20. It has been widely anticipated that all the major banks will pass.
But a source who is involved in the stress-testing process says the Fed has recently told a number of banks that it needs more data about the bank’s trading operations. An official request for more data is expected to come in the next few days. Specifically, the Fed is expected to ask the banks to report how their trading operations would do under as many as 10 different scenarios, all related to a change in interest rates.
The Fed has grown increasingly concerned that interest rates, which have been rising lately, could result in losses at the banks. For the first time this year, one of the economic scenarios included in the stress tests was mild recession and a 2 percentage point increase in the 10-year interest rate. Nonetheless, most of the large banks are believed to have told the Fed that higher interest rates would help the banks and not lead to losses.
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Higher interest rates do benefit banks. In such a scenario, they can charge more for loans. But as rates rise, banks tend to lose money on all the existing loans and bonds they already own. Most people believe a spike in interest rates would create an immediate problem for the banks. Eventually, the banks might be able to earn back that money over time on account of higher rates, but the point of the test is to determine if there are banks that may not be able to survive the initial stress.
“In general, the Fed is unhappy with the results of the tests that banks run themselves,” says bank consultant Burt Ely. “The banks do the tests in ways that is favorable to them.”
It’s unclear whether the Fed’s request for more data on the banks’ trading books is tied directly to the results of the stress test. It could just be looking for more data as part of its regular supervision of the banks. The Fed declined to comment.
The Fed has reportedly grown suspicious of the fact that a number of banks are holding onto assets that would have done well during the financial crisis of 2008. The most dire scenario in the Fed’s stress test — the one banks have to show they can weather to pass the test — is loosely based on what happened in 2008. Some at the Fed are wondering if the banks are holding onto, say, insurance against mortgage defaults, just to look good on the tests. But it’s also possible the banks have become overly cautious about protecting themselves against a repeat of 2008.
In another addition to the tests this year, banks had to try to figure out how much they might lose if their largest trading partner went bankrupt. So-called counterparty risk became an area of concern in 2009 after the Lehman Brothers bankruptcy and the near-collapse of insurance giant AIG (AIG). One observer said the counterparty default scenario is likely to boost potential losses at the major banks by as much as a few billion dollars each, not enough to cause any bank to fail the test. Last year, for example, Goldman Sachs (GS) said it would suffer nearly $25 billion in trading losses in the Fed’s worst-case scenario.
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The first portion of the stress test, which will be released this week, will indicate whether the Fed believes the banks have enough capital to weather a severe economic downtown, similar to the 2008 financial crisis. In the second round of the stress tests, which will be released on March 27, the Fed will announce whether some banks have been approved to pay dividends or buy back shares during the next year.
An executive at one bank who is involved with the stress test process says the Fed is being more critical this year, particularly on the results that individual banks are handing in as part of the process. In the past, the Fed was more interested in the results it received from its external tests of the banks.
“The Fed’s interest is to see how the banks reveal their own weaknesses,” said the executive. “The Fed keeps raising the bar.”
