Geithner Bailout Plan May Speed Bank Failures

More banks could fail as a result of the government's plan to test the health of prospective recipients before doling out new federal aid -- and maybe that's part of the point, analysts say.

The government will require so-called "stress tests" for banks with at least $100 billion in assets as a means of determining whether they need capital, Treasury Secretary Timothy Geithner said in unveiling the next stage of the financial bailout plan on Tuesday. While Geithner was vague on exact details of the plan, the stress test could be used as a way to allow certain financial institutions to fail, says Quincy Krosby, chief investment strategist at The Hartford.

"There seems to be a growing concern that perhaps we do need to allow banks to fail if the systemic risk and the ensuing doesn't replicate what happened after Lehman Brothers' demise," she says.

Nancy Atkinson, a senior analyst at Aite Group, an independent research and advisory firm, also says she suspects "there could be some more banks that, rather than be bailed out, could fail."

"I think that the government is going to be looking very closely at the asset base of each of these banks and ... looking at the write-offs and reserves for loans and making sure they're adequate," Atkinson says. "Where the surprises are going to come is when they really have to dig into these items."

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Geithner said the new bailout plan sets up a Financial Stability Trust that evaluates pressure on banks and offers them capital assistance based on that evaluation. In addition, Geithner proposed a joint public-private investment fund of up to $1 trillion to begin valuing troubled "legacy" assets on banks' balance sheets.