Major Banks Get Stress Test Results Today
Tuesday, May 5, 2009
Regulators plan to brief the nation's largest banks today on the final results of federal tests to determine whether the companies have sufficient reserves to weather the recession, with a public announcement scheduled for Thursday afternoon.
Preliminary results showed that firms including Bank of America, Citigroup and Regions Financial of Alabama needed to strengthen their capital reserves, according to sources familiar with the matter. Financial analysts believe that several other banks, including Wells Fargo, also may be required to take remedial action.
Bank executives continued to meet with regulators yesterday to push for adjustments in the findings, for example arguing that profits will exceed government expectations.
At the same time, banks are racing to develop plans to raise needed money without turning to the government. Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, said banks will have to share those plans with investors relatively quickly after Thursday's announcement.
"You can't leave that out there," Talbott said.
The government plans Thursday to release detailed loss projections and capital needs for each of the 19 banks it tested, ending months of internal debate about how much to tell the public.
The government plans to divide banks into three categories, based on the adequacy of their capital reserves to absorb projected losses. The tests are based on an economic forecast about the likely depth of the recession.
Some banks will get a clean bill of health, which the government hopes will convince investors to embrace them.
Regulators plan to tell a second group of banks to strengthen their capital reserves. Much of the capital held by the largest banks comes from the sale of preferred shares, which are structured like loans that must eventually be repaid and therefore are regarded by the markets as an unstable reserve. Banks in this category are likely to force investors to accept common shares in place of preferred shares, something Citigroup already has announced plans to do.
The third group of banks, the most troubled, lacks sufficient capital relative to outstanding loans and other commitments. These banks must either raise money from private investors or sell assets to reduce the need for capital.
Banks have six months to satisfy regulators before they will be forced to accept federal aid, something the White House hopes to avoid.
"I think everyone involved will be looking for banks to raise this through either private means or the selling of some assets that they have or that they control," White House press secretary Robert Gibbs said yesterday.