U.S. banking regulators will begin subjecting banks to stress tests later this week, with a view to assessing their capital needs amid a deepening recession.

In a joint statement from the U.S. Department of the Treasury, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve Board, the regulators said that under the plan to ensure that banks are adequately capitalized, announced on Feb. 10, “the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment” starting Feb. 25.

If these assessments indicate that additional capital is needed, “institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government,” they said.

This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis, the regulators added. Rather, it is needed to cushion against losses that may occur in the weak economic environment.

Any government capital will be provided in the form of mandatory convertible preferred shares, they said, adding that these shares would be converted into common equity only as necessary to keep banks’ well-capitalized position; and they can be retired if financial conditions improve before the conversion becomes mandatory.

Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares, they said. The conversion feature will enable institutions to maintain or enhance the quality of their capital.

“Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated,” the regulators said.

The authorities also stressed the government’s preference that banks should remain in private hands.