Ten US banks fail ‘stress tests’

Financial stress testing should establish whether banks have sufficient capital

Ten of America’s largest 19 banks need a combined $74.6bn (£50bn) of extra funds to boost their cash reserves.

That is the main finding of the so-called “stress tests” to see if the banks have sufficient capital to cope should the recession worsen.

Bank of America is the most at risk, needing an additional $33.9bn.

financial crisis

Bank of America – $33.9bn
Wells Fargo – $13.7bn
GMAC – $11.5bn
Citigroup – $5.5bn
Morgan Stanley – $1.8bn
Regions Financial – $2.5bn
SunTrust Banks – $2.2bn
KeyCorp – $1.8bn
Fifth Third Bancorp – $1.1bn
PNC Financial Services – $600m

“Our hope with today’s actions is that banks are going to be able to get back to the business of banking,” said US Treasury Secretary Timothy Geithner.

Geithner: ‘Back to business of banking’

Other banks that need more money include Wells Fargo, which is said to require $13.7bn, and GMAC, the financial arm of General Motors, which needs $11.5bn.

Citigroup requires an additional $5.5bn of funds, and Morgan Stanley has been told to find $1.8bn.

Some of the banks have already indicated how they intend to raise the money they need by private means such as asset sales, rather than having to secure any additional government loans.

‘No surprises’

The 19 banks that were tested by Treasury Department and Federal Reserve officials account for two-thirds of the total assets of the US banking system, and more than half of the total amount of credit in the US economy.

The banks that require extra capital have been given until 8 June to finalise their plans to do so, and get them approved by regulators.

Mr Geithner said earlier on Thursday that no US bank being screened by regulators was at risk of insolvency, comments echoed by Federal Reserve Chairman Ben Bernanke.

The treasury secretary said he believed that while the majority of the banks would be able to raise any additional money they need from private sources, if they were unable to do so the government may have to provide them with more taxpayer money.

Analysts broadly welcomed the results of the stress tests.

“It seems to be that the leaks were very accurate, so there doesn’t seem to be any major surprises,” said Eric Kuby of North Star Investment Management.

“The fears of nationalisation or of failure have more or less disappeared.”

Asset sale

The other five banks that have been told they require additional capital are Regions Financial ($2.5bn), SunTrust Banks ($2.2bn), KeyCorp ($1.8bn), Fifth Third Bancorp ($1.1bn), and PNC Financial Services ($600m).

Those that do not require extra funds are Goldman Sachs, JPMorgan Chase, Bank of New York Mellon, MetLife, American Express, State Street, BB&T, US Bancorp and Capital One Financial.

Some of the banks that need extra funds have been quick to announce how they intend to do so.

Bank of America said it would raise the $33.9bn it needs through the sale of assets and other measures, while Citigroup, Morgan Stanley and Wells Fargo are to issue or exchange shares.

Citigroup chief executive Vikram Pandit said his bank’s actions would “give it the financial strength to weather an adverse stress scenario”.

Criticism

Some commentators have questioned whether the tests have been strict enough.

Professor Nouriel Roubini and Professor Matthew Richardson of New York University said that the doomsday scenario that the banks’ books have been subjected to is actually no worse than the current economic situation.

And as such, they said “the stress test results will not be credibly interpreted as a sign of of bank health”.

Others say that the tests do not take account of the banks’ varying business models.

Advertisements