Bank Stress Test Results - Does Your Bank Stack Up?

So the numbers are in. The Federal regulators have published the valuations of the nation’s 19 largest banks. With new information, comes new questions. Which banks are adequately capitalized and which need to raise new capital? And the billion dollar question: where might that new capital infusion come from?

The good news is that nine banks don’t need more capital. The fortunate are: American Express, BB&T, Bank of New York Mellon, Capital One Financial, Goldman Sachs, JPMorgan Chase, MetLife, State Street and US Bancorp. The government believes that these banks have enough capital available to weather the storm.

The bad news is that ten banks need to raise new capital or raise new reserves. These banks include: Bank of America, Citigroup, Fifth Third Bancorp, GMAC LLC, KeyCorp, Morgan Stanley, PNC Financial Services Group Inc., Regions Financial, SunTrust Bank and Wells Fargo. You will recall that a good number of these banks were on a business acquisition shopping spree less than 12 months ago.[Businessweek]

The government has given the banks that need new capital one month to come up with a plan and six cumulative months to raise it. June 8 is the plan deadline, with November 9 being the deadline to have the new capital. It’s possible that capital may be raised by converting government debt into private stock.

The Fed checked to see if the banks would have at least 6% of assets in Tier 1 capital and 4% in common equity by calendar 2010. Tier 1 capital includes common shares, majority of types of common stock and TARP funds.[Sfgate.com]

The drawing board for the banks that need to create a capital cushion may include:

1) Sell company assets
2) Raise new common equity from new or current shareholders
3) Applying earnings beating analyst expectations toward new capital
4) Converting preferred shares into common stock to eliminate preferred dividends

The government has instructed the banks to seek capital from the private sector first, before asking for federal money. The Treasury Secretary Timothy Geithner believes that the majority of banks needing additional capital will be able to find it in private sources.[Bloomberg.com]

Stress tests are nothing new and have occurred for years, but are typically kept private. In these difficult times, the government is taking measures to bolster the public faith in banking. Some analysts believe that the Fed is just posturing since we have still unresolved issues with the toxic assets on the balance sheets of these banks.

On the other hand, the stress test announcement was received well by Wall Street, who feared bank nationalization. The results were not as dire as some investors had expected. In addition, more economists believe that the economy will begin to improve by 2010, which should reduce bank stress.

Wishing You Wealth in all its Greatest Forms,

Alex