Regulators have stress tested the 19 largest U.S. banks to determine their capital needs should economic conditions deteriorate further. Officials have said that they will release the results in some form this week. The markets are anxiously awaiting the results as investors try to figure out which banks are on the path to recovery and which might face pressure to raise more capital, possibly through government funds.

Investors have embarked on their own guesswork, crafting their own results of the governments’ tests. Some banks’ shares have already been punished following early leaked reports that they will need more capital. Citigroup may have to raise more capital, according to preliminary results of its stress test, people familiar with the matter said on Tuesday, and Bank of America Corp may need billions of dollars more, the Wall Street Journal has reported.

Most experts agree that the idea of the stress tests has changed since Treasury announced the exercise in February. The original intention was to use the tests to determine which banks might need to participate in a new government capital infusion program, but market appetite for information on banks’ health has expanded its significance. Officials have said that the public disclosures will likely allow outside analysts to test their own assumptions of the banks’ health against regulators’ assessments.

However, a document the Federal Reserve released last Friday revealing the underlying assumptions of the stress tests did not include many specifics. The government has to decide whether to release the results of individual banks next week, or just disclose summary information for all the tested banks. Regarding whether banks themselves self disclose, bank examination findings are generally exempt from U.S. Securities and Exchange Commission disclosure requirements. Some experts have argued that the stress test process has risen to the level of a material event that investors should be informed about.

The  U.S. Treasury Department already tried to keep investors from panicking, and that failed miserably. When former Treasury Secretary Henry Paulson unveiled the Troubled Asset Relief Program, or TARP, last October, nine top banks participated in the first round of funding, while others, most notably JPMorgan Chase and Wells Fargo , reportedly objected to the idea that they needed government funding. In the end  those banks were force-fed TARP money so that Paulson could spin TARP as a program that healthy institutions would use to build capital to increase the flow of financing to U.S. businesses and consumers. 

Paulson feared shares of problem banks would be crushed if the Treasury Department positioned TARP as funding only for troubled banks. But that’s exactly what happened anyway. From the time that Paulson first unveiled the TARP last October up until the market hitting its low point in early March, the banks in most dire need of capital lost much of their market value. Shares of Citigroup and Bank of America which both required further injections from TARP after their initial round in October, each plummeted about 90%.  Shares of Wells Fargo, which last week preannounced a better-than-expected profit, dropped 75%. JPMorgan Chase, which has remained profitable throughout the credit crisis, fell more than 60%.  Even investment bank Goldman Sachs , which this week posted stronger than anticipated results and announced its intention to pay back the $10 billion in TARP funds it received last year, fell about 40%.  Still, there were rumblings earlier this week that the Treasury was worried about Goldman’s plan to return its TARP money because investors may wonder why other banks weren’t ready to do the same. That just smacked of doublespeak. It’s not good to show signs of strength because it makes the weak look bad! Fortunately, it seems that Treasury has reconsidered its stance. And it probably had no choice now that the better positioned financial firms intend to force the Treasury to recognize that there are good banks and bad banks.

Goldman and Wells seem hell bent on doing everything they can to distance themselves from some of their more troubled peers. Insurer MetLife is doing the same thing. MetLife confirmed Monday that it is one of the 19 firms undergoing a stress test. That’s because it has a bank holding company that it set up in 2001 that has more than $100 billion in assets. But MetLife added that it decided to not apply for any TARP funds, citing its “strong balance sheet.” Expect JPMorgan Chase to tout similar strength when it reports its results Thursday morning. And that’s all good. The Treasury now believes that the strong banks, the survivors, will find demand for new money and will be able to raise it privately.

The New York based lender Citigroup, who had received three U.S. government rescue packages watched as its shares rose 25 percent higher.  The financial giant Bank Of America gained 15 percent and Goldman Sachs added five percent.  The nation’s second biggest home lender, last week reported about three billion in first quarter net income which was up from the previous year.  Apparently, the financial giants are leading the U.S. market recovery. 

Now that the banking sector is stabilizing experts believe the cycle will continue to move upwards. Citigroup, Goldman Sachs and JP Morgan who are all based in New York, are scheduled to release earnings this week. Bank of America, based in Charlotte, North Carolina, and New York’s Morgan Stanley will report next week, along with Wells Fargo. Citigroup and Morgan Stanley are expected to report a loss on a per-share basis, and the four others will probably post a profit, according to analysts’ estimates compiled by Bloomberg. Fears of nationalization have pretty much vanished as it’s becoming clear that the banks are slowly getting back on their feet.