U.S. Bank Stress Tests to Show Capital Needs
February 22nd, 2009Via: Reuters:
U.S. financial regulators will soon launch a series of “stress tests” to determine which of the largest U.S. banks should get bigger capital cushions in case of a deeper recession, a person familiar with Obama administration plans said on Saturday.
The person, speaking on condition of anonymity, said if institutions were found to need additional capital, financial authorities would provide them with an “extra cushion of support.”
Banks are expected to receive additional information about the tests in the coming week from regulators.
The largest U.S. banks are “well capitalized” for current conditions, the source said, but the Obama administration wants to ensure they can withstand a more severe economic climate and play an important role in helping restart the flow of credit.
Initial plans for the stress tests were announced on Feb. 10 as part of Treasury Secretary Timothy Geithner’s bank stabilization plan, but the source on Saturday for the first time linked the tests to additional government support for large banks. That person did not specify what form any extra capital cushion may take.
Little is known about the form of the stress tests, but the person described them as “consistent, forward looking and conservative.”
The Obama administration tried on Friday to ease market fears the government was poised to nationalize some large banks that are struggling with losses and a lack of confidence, notably Citigroup (C.N) and Bank of America (BAC.N).
Bank shares fell sharply, with Citigroup plunging 22 percent to below the $2 fee of a typical automated teller machine, or ATM, and Bank of America trading around the $4 level.
White House spokesman Robert Gibbs said on Friday, “This administration continues to strongly believe that a privately held banking system is the correct way to go.”
That was quickly echoed by a statement from the U.S. Treasury.
INVESTORS LOSE CONFIDENCE
Citigroup and Bank of America have each received $45 billion in government capital in recent months and guarantees against losses on portfolios of illiquid mortgage assets — aid that now exceeds their market value.
With investors losing confidence in the sector as recessionary losses on real estate and commercial loans mount, analysts say the government may have to do more to prop up the largest banks.
But rather than opting for a sweeping takeover, the government may act more incrementally, demanding a little more control every time Bank of America or Citigroup seeks more capital, analysts said.
