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Stress lifts ahead of today's bank test report
(China Daily)
Updated: 2009-05-08 07:58

Stress lifts ahead of today's bank test report

Federal regulators today unveil what Treasury Secretary Timothy Geithner said will be a "reassuring" picture of a US banking system able to withstand whatever stresses the recession may inflict on it once a handful of institutions add to their capital base.

Federal Reserve stress tests on the 19 biggest lenders show Bank of America Corp, Wells Fargo & Co and Citigroup Inc together require about $54 billion, said people familiar with the conclusions.

Goldman Sachs Group Inc, JPMorgan Chase & Co and Bank of New York Mellon Corp have enough capital to help prop up flows of credit to businesses and consumers fighting the worst recession in five decades.

"There is very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward," Geithner said yesterday in an interview with PBS television's Charlie Rose program.

"I think the results will be, on balance, reassuring," Geithner said. "None of those 19 banks are at risk for insolvency."

Bank stocks surged yesterday in anticipation that firms won't need as much capital as once projected; the Standard & Poor's 500 Financials Index rallied 8 percent. Officials favor filling the shortfall by converting preferred shares into common stock, enabling the Obama administration to keep aside most of the $110 billion left in the Troubled Asset Relief Program.

Geithner, Fed Chairman Ben S. Bernanke, Federal Deposit Insurance Corp Chairwoman Sheila Bair and Comptroller of the Currency John Dugan are scheduled to brief reporters before the release of the results, at 5 pm Washington time.

Regulators said yesterday banks that have to bolster capital will have until June 8 to develop a plan and until Nov. 9 to implement it.

Officials put an emphasis in their reviews on tangible common equity, requiring the companies to have the equivalent of 4 percent of their assets after adjusting for risk. The financial yardstick strips out intangible assets, goodwill and preferred stock.

The reviews were designed to ensure firms could sustain lending even if house prices, gross domestic product and the job market deteriorate.

Stock rally

The S&P 500 Financials Index yesterday reached its highest level in four months. The broader S&P 500 Stock Index added 1.7 percent at 919.53. Citigroup jumped 17 percent to $3.86 and Wells Fargo advanced 15 percent to $26.84.

Oil rose toward $58 a barrel yesterday, hitting a fresh 2009 high, as a surge in global stock markets raised expectations of economic improvement. US light crude for June rose $1.55 cents a barrel to $57.89.

Bank of America has the biggest shortfall, at $34 billion, according to people familiar with the matter. Citigroup's requirement is $5 billion, people with knowledge of its results said.

Wells Fargo needs about $15 billion, while GMAC LLC's gap is $11.5 billion, one person said. MetLife, American Express, BB&T Corp and Capital One Financial Corp were deemed not to need additional funds.

Morgan Stanley may need between $1 billion and $2 billion, according to people familiar with the matter. Any capital requirement would result from Morgan Stanley's plans to pay $2.7 billion to take control of Citigroup's Smith Barney brokerage venture, one of the people said.

Spokespeople for all of the 12 banks declined to comment.

For firms judged to have additional capital needs, regulators have detailed options including conversions of preferred shares, asset sales and raising new funds from private investors.

Should the banks needing bigger capital buffers opt to convert the Treasury's preferred shares, the government will have a bigger ownership stake. Officials may set limits on those companies' dividends and political lobbying.

'Next stage'

"Going forward, we just need banks to be able to issue debt without the FDIC backing; that's the next stage for these bank names in terms of evaluating their health," said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York.

Institutions that need to raise their capital levels "need to look to nongovernment sources first, the FDIC's Bair told lawmakers. "The Treasury can be there as a backstop."

TARP exit

For many banks, the government's stamp of approval may point to an exit from the TARP. The fund was initially aimed at boosting public confidence in banks by making the government a shareholder. Bernanke said May 5 it "helped us dodge what would have been a truly cataclysmic collapse of the global banking system."

Congress later used the program to increase scrutiny of Wall Street, and passed legislation imposing executive pay limits. In February, lawmakers called eight bank chief executive officers to Washington to face criticism for outsized compensation and perks at a time when firms racked up losses.

JPMorgan Chief Executive Officer Jamie Dimon said April 16 that he could repay the New York-based firm's $25 billion in taxpayer funds "tomorrow" and referred to the money as "a scarlet letter."

Repayment would free the company from compensation restrictions and other oversight.

Bloomberg News

(China Daily 05/08/2009 page17)