Regional banks will soon get their own stress test results in the familiar form of the shared national credit exams, but the report card could be uglier than ever.

Though regulators will continue evaluating data from the annual exams for several months, their findings are anticipated as possible answers to many lingering questions about the health of the economy and the banking industry.

The results, which are due no later than October, might provide more clarity for banks that are deemed too small for the Treasury Department's stress tests but are big enough to deal in syndicated, commercial loans — and may be decidedly exposed in this category.

Capital concerns at many regional banks have been overshadowed lately by the stress tests, but a severe spike in criticized assets could shift the spotlight back on them.

Observers for the most part say the results will be hard for investors to stomach, which could force more banks to raise more capital to further build reserves. They would be doing so after many larger banks have already flooded the markets with equity issues either to meet the stress test's "worst-case scenario" or to exit the Troubled Asset Relief Program.

"In some ways, the exam will be a proxy for the regional banking system," said Steven Sandler, the chief executive of Crosswind Capital LLC, which buys distressed assets. "You are basically going to have a stress-type test levered on to the smaller and regional institutions, and it could expose them as being weaker than many of the larger institutions."

Bankers were largely reluctant to discuss the exams as the appeals process approaches, but their representatives were blunt about the industry's level of anxiety.

Robert Clarke, a senior partner at Bracewell & Giuliani and a former comptroller, said the process is causing his clients considerable stress. "Banks are scared to death about these exams," he said, particularly over how regulators might react. "Everyone is in a big sweat about commercial loans."

"Bet your bottom dollar, it's going to be a disaster," predicted Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets. In addition to deteriorating credit, Cassidy said he believes the exams will find that loan commitments are shrinking as banks rein in lending.

Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency, would only confirm that the exams are nearly complete and that the findings "seem to be on track" for a fall release.

Commercial loans may be the last asset class to sour before the recovery can occur.

Observers point to several industries for the expected rise in bad assets, predominantly real estate-related sectors such as hospitality, retail and office and industrial development, which could be problematic for regional banks that focus on such areas. Auto, media and broadcasting, and service industries are also expected to suffer, and concerns could intensify if other sectors surprise with major credit fissures.

Last year's exams revealed signs of stress among loans $20 million or larger spread among at least three lenders. Criticized assets more than tripled last year, to $373.4 billion, making up 13.4% of all shared national credit commitments. Many expect those numbers to rise this fall and again when the exams are conducted in 2010.

So far, much of the evidence of credit deterioration has been anecdotal. For instance, Synovus Financial Corp. of Columbus, Ga., said in April that it was the lead lender for a $220 million resort credit it placed on nonaccrual status in the first quarter. The $35 billion-asset company, which is considerably smaller than the 19 banks that underwent stress tests, said two other banks, which it did not name, were also involved.

The results could also shed light on whether banks have been effective in closing credit lines to problematic clients. Though credit commitments rose 22.6% in last year's shared national credit exam, more bankers this year have acknowledged an effort to shut down unfunded commitments even as cash-strapped clients try to tap the lines.

Corporate loan books, for instance, shrank 3% in the first quarter from a year earlier, according to data from the Federal Deposit Insurance Corp. Any contraction in the shared national credit exam should renew debate on whether Tarp fund recipients should be making more loans. Benign results would bolster those who want more lending; poor results would likely validate the conventional wisdom that banks must minimize exposure when gross national product is headed in the wrong direction.

Jeff Davis, the director of research at Howe Barnes Hoefer & Arnett Inc., said regulators "are trying to be careful not to discourage lending, so clamping down on the shared national credit exam would not be helpful."

Yet David Gibbons, a managing director at Promontory Financial Network LLC and a former deputy comptroller for credit risk, said the results will provide a sense of how the industry is curbing riskier practices in areas such as structured credits and leveraged lending. "Regulators will be very cautious and looking very closely at the new loans to make sure" banks are not repeating past mistakes, Gibbons said.

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