Feds to Tell Banks How They Did on ‘Stress Tests’
Posted: Wednesday, July 22nd, 2009 at 2:26 pm
WASHINGTON—The 19 largest banks in the United States will be told today how they did on their “stress tests” and, depending on the results, will be informed of regulators’ final decisions on how much capital needs to be raised.
The announcement on Thursday will also report how much banks would lose if the recession worsened. If the test found that a bank’s reserves would fall below the minimum level allowed, then that bank would have to raise more capital beyond what the expectations are required currently.
These “stress tests” are a key part in the government’s plan to fix the financial system, but analysts still say there are still serous problems, including bad assets.
A way for banks to increase capital is to convert the government’s existing stake in them from preferred shares, which is a form of debt, into common stock.
In addition, banks could be given six months to raise money from investors. If that plan fails, government could give them more money from the $700 billion bailout fund. Analysts and investors have been worried about this for weeks. The fear is that the findings will be negative and that will cause investors to sell their stocks.
However, Wells Fargo & Co. stock increased more than 23 percent. “Obviously, the market is not worried about (the stress tests) right now,” said Robert Pavlik, chief market strategist at Banyan Partners LLC. “This is going to be seen as a giant non-event.”
Initial results were given to the banks last month. Spokesmen for New York-based Citigroup and Charlotte, N.C.-based Bank of America would not comment on whether they had been asked to raise more capital. Bank of America spokesman Scott Silvestri called a news report that it plans to raise $10 billion “completely inaccurate” because final figures have yet to be confirmed.
Andrew Mawquardt, a bank analyst at Fox-Pitt Kelton, said Wells Fargo’s capital risk is fairly minimal. “If indeed they need additional capital, it’s going to be a fairly modest amount.”
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