April 15 (Bloomberg) -- House Financial Services Committee Chairman Barney Frank urged more transparency in stress tests at the 19 biggest lenders, saying regulators shouldn’t “hide from people the fact that banks are at different strength levels.”

The tests, being conducted now, aim to determine whether the banks need more government aid to withstand increased losses as the recession extends into a second year. The Federal Reserve told banks not to talk about the tests in earnings conference calls, people familiar with the matter said last week.

“Trying to hold things back, particularly with the degree of public involvement though funds, just isn’t going to work,” Frank said today in a Bloomberg Television interview. “I think the results ought to be made public,” he said, declining to say how that should happen.

Regulators are using the tests to determine whether the 19 banks have enough capital to cover loan losses during the next two years if the economy shrinks, unemployment surges and housing prices keep declining. They are a linchpin of the plan Treasury Secretary Timothy Geithner announced in February to bolster confidence in the banks and restore market stability.

“If you are trying to conceal all this information, you might make it worse,” Frank said.

Goldman Sachs

Frank today also reiterated that Goldman Sachs Group Inc.’s ability to raise $5 billion to help repay $10 billion received from the government in October is a “very positive sign.” He said other financial institutions need to show that funds from the Troubled Asset Relief Program are “being well used” before lawmakers expand the federal rescue program.

“By the year anniversary of the TARP program, as much as 10 percent of that $700 billion, through dividends and repayments, most of that will be repaid,” the Massachusetts Democrat said. “I think that is an encouraging sign.”

Bank of America Corp. and Morgan Stanley have said they want to return the TARP money soon, and six smaller institutions including Sun Bancorp of New Jersey and Iberiabank Corp. have already repaid $442.3 million. Banks taking the U.S. aid are limited in their compensation policies.

Congress needs to adopt legislation that diminishes the compensation incentives that reward risk without corresponding penalties for failure, Frank said.

“There is a danger to the economy in an incentive structure that incentivizes risk and doesn’t penalize it because any rational person will then take too much risk,” he said.

Frank, who has pledged to pass legislation overhauling U.S. financial services regulation, repeated his recommendation that lawmakers create new authority to wind down failing non-banking institutions.

To contact the reporters on this story: Margaret Chadbourn in Washington at mchadbourn@bloomberg.net; Peter Cook in Washington at pcook6@bloomberg.net.

Last Updated: April 15, 2009 11:47 EDT