Posted on 08 May 2009
Ten of the 19 largest U.S. financial institutions will be required to raise a combined $75 billion in capital, as the U.S. government for the first time divided healthy banks from those which may need help to weather a worsening economy.
U.S. officials stressed that the move to bolster capital needs to occur across the banking industry, not just at the 19 largest firms. Treasury Secretary Timothy Geithner said the department will reopen existing programs to make capital available to banks of all sizes, suggesting the U.S. government's intervention in the financial markets could go on longer than expected. "It's very important that the rest of the system has the access to capital," Mr. Geithner said.
He added later: "When you have the opportunity to raise capital, you should raise capital."
Appearing alongside Federal Reserve Chairman Ben Bernanke and Comptroller of the Currency John Dugan, Mr. Geithner said indications from banks was that they are "reasonably confident" they can raise the needed capital.
Mr. Bernanke said the results show that the quality, more than the quantity, of capital at the banks is what needs to be improved.
WSJ's Dave Kansas tells you what to do if your bank has failed the government's stress tests.
"The results released today should provide considerable comfort to investors and the public," Mr. Bernanke said, saying definitively that the tests were "not tests of solvency."
Bank of America Corp., Citigroup Inc., Wells Fargo & Co., GMAC LLC and Morgan Stanley were told they need to raise capital due to the results of the government's stress tests. Regions Financial Corp., Fifth Third Bancorp, KeyCorp, PNC Financial Services Group Inc. and SunTrust Banks also were told to bolster their reserves.
By contrast, J.P. Morgan Chase & Co., Goldman Sachs Group Inc., American Express Co., BB&T Corp., State Street Corp., MetLife Inc., Bank of New York Mellon Corp., US Bancorp and Capital One Financial Corp. don't need to raise additional capital.
Bank of America must raise nearly $34 billion in capital, more than any of its peers. All 10 banks will need to raise Tier 1 common capital to bolster their reserves.
Wells Fargo and Morgan Stanley moved quickly to address the government-identified shortfalls, announcing they will sell billions of dollars in stock. Wells Fargo said it will offer $6 billion in stock, while Morgan Stanley said it intends to sell $2 billion. Additionally, Morgan Stanley said it would also sell $3 billion of senior notes not guaranteed by the Federal Deposit Insurance Corp.
The directives come after the government's weeks-long exercise testing how the 19 banks would fare under darker economic scenarios.
Mr. Bernanke said the tests don't represent a new capital standard for all U.S. banks, stressing that it was a one-time event and that there are no plans to extend the tests to smaller institutions. Banks have enough Tier 1 capital, but need to improve the quality of what they are currently holding.
"What we found out is that the quality needed to be improved," Mr. Bernanke said. "It's that improvement of quality that seems to be the weakness of the capital structure right now."
Analysts were divided on the importance of the results' release. Sung Won Sohn, a professor at the California State University Channel Islands, said a "sigh of relief" was the best way to summarize the situation.
"Assuming the economy continues to recover, there is a possibility some of the banks could be overcapitalized," he said.
Lawrence White, who teaches micro-economics at the Stern School of Business, said the tests do not provide a true snapshot of the banking industry.
"I have a feeling when this set of announcements is behind us we are not going to hear from the stress test again," Mr. White said.
Mr. Geithner said the Treasury Department currently has enough money left over from the original $700 billion to help the 19 banks achieve the capital buffers required by the government. He declined to say whether reopening capital assistance programs to all banks would require the administration to return to Congress to request additional funds.
The Treasury painted a grim picture of the toll of the financial crisis on the banking system. It said total losses at the 19 banks due to the crisis that began in mid-2007 could reach $950 billion.
Meanwhile, losses in 2009 and 2010 at the 19 banks could total $600 billion under the government's scenario of a deepening economic downturn. Mortgage loans and consumers loans could account for 70% of the potential losses.
Mr. Geithner said people were free to judge whether the government was conservative in deciding the banks' capital needs.