Results of bank stress tests leak ahead of report

  • Business
  • Thursday, 07 May 2009

WASHINGTON (AP): Government stress tests are expected to show that nearly a dozen of the nation's largest banks do not have enough money to survive if the economy worsens and will need to raise billions of dollars as a precaution.

Findings of the government's long-awaited tests of 19 banks leaked out Wednesday, a day ahead of an official announcement.

Investors cheered reports that American Express, JPMorgan Chase and Bank of New York Mellon have enough capital to endure and even pushed up the stocks of banks that may need more capital.

But the public nature of the assessments also raised questions among some critics about whether the findings will reflect the banks' actual conditions.

The tests put banks through two scenarios: one that reflected expectations about the current recession and another that envisioned a recession deeper than what analysts predict.

Citigroup Inc. will need to raise about $5 billion, according to a government official briefed on the results who spoke on the condition of anonymity because he was not authorized to discuss the matter. Earlier news reports had put that dollar figure closer to $10 billion.

Regions Financial Corp. will also need to raise more money, according to people briefed on the results, as will Bank of America Corp. and Wells Fargo & Co.

Bank of America stock rose Wednesday after reports that the Charlotte, North Carolina-based company would need to collect $34 billion in additional capital. The New York Times and Wall Street Journal reported the figure. The Journal cited unidentified people familiar with the situation, while the Times quoted a bank executive.

Stress tests have long been a part of the bank regulation system. They help regulators decide how to supervise banks and help banks decide how to limit their risk. Those conversations between banks and regulators normally take place behind closed doors.

In recent weeks, the government's unprecedented decision to publicly release bank-test results has fanned speculation, with analysts predicting the findings and investors staking out trading positions.

Critics are concerned that all the attention could make the tests much less effective. They say regulators seem so intent on maintaining public confidence in the banks that the results will have to say the banks are basically healthy, though some need to raise more capital.

"There is a real question as to the legitimacy of these results," said Jason O'Donnell, senior analyst at Boenning & Scattergood Inc.

The stress tests are a key part of the Obama administration's plan to stabilize the financial industry.

The tests estimated how much value the banks' loans would lose as consumers and businesses faced more trouble repaying loans.

The first test scenario envisioned unemployment reaching 8.8 percent in 2010 and housing prices dropping another 14 percent this year. The second imagined unemployment rising to 10.3 percent next year and homes losing another 22 percent of their value this year.

The government is asking banks to keep their capital reserve ratios above a certain level so they can continue lending even if the economic picture darkens.

Banks will have several options for increasing their capital. Some will be able to close the gap by converting the government's debt into common stock. Others will have six months to attempt to raise money from private investors. If they cannot do it, the government will provide money from its $700 billion financial system bailout.

The banks that need more capital will have until June 8 to come up with a plan to raise the additional resources and have the plan approved by their regulators, officials said Wednesday.

Economic assumptions have changed since the tests were designed in February.

Unemployment already has surpassed the 8.4 percent the test's first scenario predicts for 2009, which left some analysts wondering whether the tests were harsh enough.

Officials have said they will not let any of the 19 institutions fold. That makes it almost impossible for them to say anything about a bank that would threaten its survival, since a flight by investors could force the government to step in with additional bailout money _ something the Treasury Department hopes to avoid.

Doing the stress tests publicly "negates the whole point" of stress testing, because regulators know tough action could imperil the banks, said Jaidev Iyer, a former risk management chief at Citigroup who now works at a nonprofit involved in bank risk analysis.

The government originally intended to keep the results mostly secret, but later reversed course. Disclosure of the results would provide investors better information about the banks' conditions, officials hoped.

Open discussion of the stress tests has made it hard for regulators to be as candid as they would like, said Bradley Sabel, a veteran bank supervisor with the Federal Reserve Bank of New York now at the law firm Shearman & Sterling.

"I think there's an awful lot of value in keeping confidential the discussions between banks and examiners," he said.

But the publicity could serve the administration's political aims. "The stress test was a clever stalling action from a tactical point of view," said Simon Johnson, a former chief economist with the International Monetary Fund now at the Massachusetts Institute of Technology.

"They wanted to wait until the economy showed signs of bottoming out. Now, everyone's more relaxed, and they can go easier on the banks."

Representatives for American Express Co., JPMorgan Chase & Co., Bank of New York Mellon Corp., Citigroup and Regions Financial would not comment on the tests.

The remaining stress-tested banks are: Goldman Sachs Group Inc., Morgan Stanley, MetLife Inc., PNC Financial Services Group Inc., U.S. Bancorp, GMAC, SunTrust Banks Inc., State Street Corp., Capital One Financial Corp., BB&T Corp., Regions Financial Corp., Fifth Third Bancorp and Keycorp.

Financial stocks surged Wednesday amid reports on the stress tests. Bank of America gained 17 percent, Citigroup surged 16 percent and Wells Fargo gained 15 percent.

Results of the government's stress tests of financial companies with at least $100 billion in assets are expected Thursday after the markets close. Some details of those tests follow:

The 19 companies that were tested are: JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley, MetLife Inc., PNC Financial Services Group Inc., U.S. Bancorp, Bank of New York Mellon Corp., GMAC LLC, SunTrust Banks Inc., State Street Corp., Capital One Financial Corp., BB&T Corp., Regions Financial Corp., American Express Co., Fifth Third Bancorp and KeyCorp. The tests projected how the companies would perform over two years under current predictions about the recession and if the downturn worsened. The tests were conducted by the banks' primary regulators but overseen by the Federal Reserve. Administration officials say the test results will help them decide which banks are healthy, which need to raise more money and which are in danger of failing. Analysts expect at least half of the banks will be asked to raise more capital, including Bank of America and Citigroup. Banks deemed to need more capital will be given six months to raise money in the private markets. The government also could convert its existing stake in the banks from preferred shares - a form of debt - into common stock. That would give the banks more protection against future losses. But it would dilute the value of common shares and put taxpayer dollars at more risk.

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