Stress test results show 10 US banks require $75b of capital

Friday 8th May 2009

Ten of America’s 19 largest banks need an infusion of new capital, according to the Federal Reserve, with the total estimated at US$74.6 billion, based on the results of the so-called stress tests.

The 19 banks assessed hold two third of the assets and more than half the loans in the US banking system. Three federal agencies, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. worked together starting in February, applying ‘what-if’ scenarios to the 19 lenders. Collectively, the banks hold two thirds of the assets and more than half the loans in the US banking system.

“The results released today should provide considerable comfort to investors and the public,” Fed Chairman Ben Bernanke said in a statement published on the central bank website. “Nearly all the banks that were evaluated have enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical adverse scenario,” he said. Still, “roughly half the firms” need to “enhance their capital structure to put greater emphasis on common equity, which provides institutions the best protection during periods of stress.”

The stress-test assessments were initiated after the Treasury had provided more than US$200 million in taxpayer funds to financial institutions to underpin the banking system and help free up credit. The aid flowed after Lehman Brothers Holdings was allowed to fail and the government seized control of insurer American International Group Inc.

In addition, the Congress approved the US$700 billion, which was helped build capital at the banks.

Bank of America tops the list, requiring some US$33.9 billion in additional capital, according to the results of the Supervisory Capital Assessment Program, published on the Fed’s website.

Wells Fargo requires US$13.7 billion and GMAC LLC needs NZ$11.5 billion. Citigroup, which is already moving to convert some preferred shares into ordinary shares, required extra capital was assessed at US$5.5 billion.

Regions Financial Corp. requires US$2.5 billion, SunTrust Banks needs US$2.2 billion, KeyCorp needs US$1.8 billion and Morgan Stanley requires $1.8 billion. Fifth Third Bancorp requires US$1.1 billion.

Banks assessed as having adequate capital to meet a downturn are: Goldman Sachs Group, JPMorgan Chase, bank of New York Mellon, Metlife, American Express, State Street, BB&T Corp., US Bancorp and Capital One Financial Corp.

Bernanke said the stress tests “were not tests of solvency.”

“We knew already that all these institutions meet regulatory capital standards,” he said. “Rather, the assessment program was a forward-looking, ‘what-if’ exercise intended to help supervisors gauge the extent of the additional capital buffer necessary to keep these institutions strongly capitalized and lending, even if the economy performs worse than expected between now and the end of next year.”

Bank of America shares climbed 6.5% to US$12.69 yesterday, leading the Dow Jones Industrial Average higher. The shares have tumbled 72% in the past 12 months.

Banks requiring more capital have until June 8 to develop a plan and until November 9 to undertake the capital raising.

For a link to the joint statement by the Federal Reserve, Treasury, FDIC and OCC on Treasury Capital, click here.

(Businesswire)

Businesswire.co.nz

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