The Stress Test Is Expected To Stress Big Banks Even More
Wednesday, May 06, 2009SUSIE GHARIB: A new stress test requirement. Late today federal regulators outlined new guidelines for the nation's biggest banks needing additional capital under the so-called stress test. Those banks will have to review their current management and board of directors to make sure they have the right leadership in place. And they'll have to submit a detailed plan for raising that capital. The deadline for both blueprints is June 8th. The firms will also have until November 9th to actually raise the funds. Meanwhile, early reports on those stress reveal that many of the nation's biggest banks need to raise billions of dollars in new capital, but not as much as feared. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: FDIC Chairman Sheila Bair told lawmakers the bank stress test results should reassure investors about the ability of the nation's top banks to withstand further declines in the economy.
SHEILA BAIR, CHAIRMAN, FDIC: I think this will be a confidence- instilling announcement. There will be additional needs for capital buffers for some institutions, but I think there will be mechanisms to do that within the next six months.
DHUE: But many bank analysts, including Bert Ely, aren't convinced.
BERT ELY, BANKING CONSULTANT, ELY & COMPANY: There is a lot of concern in the investment community that the stress test results are going to kind of whitewash a lot of the problems in the banking industry, and that they will not provide realistic assessments of the amount of additional capital that some of the weaker banking companies need to raise.
DHUE: Sources tell NIGHTLY BUSINESS REPORT 10 of the 19 banks tested will need to increase their capital buffer. So far, here is what the numbers look like: Bank of America will need $34 billion; Wells Fargo $15 billion; GMAC, $11.5 billion; Citibank, $5 billion. Regents, Fifth Third (FITB), and SunTrust (STI) will also need a greater capital cushion. Bair gave some details about how those banks could get the capital.
BAIR: Those institutions need to look to non-government sources first. The Treasury can be there as a backstop, but they should look to non-government sources first, and first and foremost to raise new equity if possible.
DHUE: Some banks may also make up the shortfall by converting preferred stock into common stock, a move Ely says would be less than confidence-inspiring.
ELY: These preferred to common conversions don't bring any additional capital into the bank. They just -- it's kind of really kind an act of window-dressing by increasing the amount of common equity in the bank.
DHUE: The stress test results will be officially released tomorrow, with many of the results already being leaked, those disclosing the information, hope it will be a non-event for the financial markets. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
GHARIB: In other stress test news tonight, firms that pass the test have a new requirement before they can repay TARP funds to the Treasury. Regulators say that banks will have to prove they are strong enough and have the money to be able to keep lending through a deeper recession. Right now many banks are raising money by issuing bonds backed by the FDIC. Now if banks want to repay their government loans, regulators say they'll also have to show they can issue debt without any guarantees from the federal government.
