U.S. regulators Thursday unveiled the long-waited results of the government's stress tests and urged 10 of the nation's 19 largest banks to raise about 75 billion dollars in new capital to withstand future losses if the recession worsened.
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Photo taken on May 6, 2009 shows the headquarters of Citigroup Inc. in the borough of Manhattan in New York, the U.S.. U.S. regulators Thursday unveiled the long-waited results of the government's stress tests, which show that 10 of the nation's 19 largest banks need a total of 74.6 billion dollars.
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Federal Reserve chairman Ben Bernanke said the results "should provide considerable comfort to investors and the public," noting nearly all the banks have sufficient capital "to absorb the higher losses envisioned under the hypothetical adverse scenario."
The assessment results are "just one important element of the governments broader and ongoing efforts to strengthen the financial system and the economy," said the U.S. central bank chief in a statement.
"Roughly half the firms, though, need to enhance their capital structure to put greater emphasis on common equity, which provides institutions the best protection during periods of stress," he said.
More capital needed
Among the institutions needing more capital, Bank of America needs to raise 33.9 billion dollars in capital with Wells Forgo needing 13.7 billion dollars and the auto and mortgage lender GMACLLC requiring 11.5 billion dollars, said the Federal Reserve, which led the tests.
Meanwhile, Citigroup requirement for deeper reserves to withstand future losses is about 5.5 billion dollars and Morgan Stanley needs 1.8 billion dollars. Regions Financial Corp., Fifth Third Bancorp, KeyCorp, PNC Financial Service Group Inc. and SunTrust Banks also were told to bolster their reserves.
By contrast, Bank of New York Mellon Corp, American Express Co., Capital One Financial Corp, Goldman Sachs Group Inc, JPMorgan Chase & Co., U.S. Bancorp, BB&T Corp., State Street Corp. and MetLife Inc do not need capital.
The revelation that Bank of America needs about 33.9 billion dollars to fill the hole will increase pressure on Ken Lewis, the company's embattled chief executive.
The tests also found that total credit losses for the 19 banks may reach 600 billion dollars in 2009 and 2010. All told, if the economy performs as badly as the worst case scenario used in the stress test, the 19 banks' losses would mount to 950 dollars billion from mid-2007 through 2010.
U.S. regulators gave the banks that are found to raise more capital one month to come out with the plan.
"Over the next 30 days, any bank holding company (BHC) needing to augment its capital buffer will develop a detailed capital plan to be approved by its primary supervisor, in consultation with the FDIC, and will have six months to implement that plan," said a joint statement released by Treasury Ministry and other regulators.
Banks needing to augment its capital buffer will have until June 8th to develop a detailed capital plan, and until November 9th to implement that capital plan.
No risk of insolvency
Some investors said the result of the government's two-and-a-half month examination was less negative than many feared. Other held out the idea that many banks would be able to boost their capital without government's support.
The U.S. government hopes the results would help restore confidence and encourage lending.
"This is just the beginning and we are going to keep working to try and make sure this financial system is in ... a strong enough position so it can provide the credit necessary for recovery," Treasury Secretary Timothy Geithner, noting that none of the 19 banks are at risk of insolvency.
His remarks were echoed by White House spokesman Robert Gibbs.
"I think what we're likely to see is some confidence in our financial system and some genuine clarity about the path moving forward," said Gibbs at the daily press briefing, noting the banks will emerge stronger to help the economy rebound.
Earlier this week, Bernanke Tuesday also ruled out the possibility of a massive new round of bailouts to save the U.S. banking giants.
"I've looked at many of the banks and I believe that many of them will be able to meet their capital needs without further government capital," Bernanke told the Congress' Joint Economic Committee on Tuesday.
The government has said in the past that no large bank will be allowed to fail.
The banks that require more funds could raise new common equity from existing shareholders ore new investors, convert preferred shares held by private investors or the government into common equity or sell additional assets.
If banks still could not raise enough capital to meet the stress test requirements, they could apply support from the 700 billion bailout funds.
The unveiling of the result marked the end of a process designed by the Obama administration to restore confidence in the banking industry.
However, some economists and investors were skeptical about the credibility of the tests.
"At best, the process may have been a waste of time; at worst, it's something that has caused more confusion," said Mike Holland, chairman of private investment firm Holland & Co.
Tough exit rules
U.S. regulators also imposed strict rules on banks that want to exit the financial bailout program, requiring them to demonstrate to the government that they can survive without its support.
Banks generally must apply to the Treasury and secure permission from their bank supervisor in order to repay the federal bailout funds, so far only a handful of small banks have done so.
The 19 largest banks seeking to withdraw from the 700 billion dollars rescue program will have to prove that they can borrow money without the support of the Federal Deposit Insurance Corp, said the U.S. regulators in a joint statement released on Wednesday.
The guarantee of debt issuance offered by the FDIC allows banks to borrow money relatively inexpensively. Banks have more than 330billion dollars in debt outstanding under the program.
The new rules could deter some banks such as Citigroup and Bank of America from trying to repay bailout funds early, said analysts
Some banks including Goldman Sacks, JPMorgan Chase, have vowed to exit the bailout program as soon as possible in part to prove their financial health, but also to escape from tough rules governing executive pay.
(Xinhua News Agency May 9, 2009)
