Bank Stress Test Results Revealed Thursday

The nation's 19 largest banks have gotten the final results from the government's stress tests. Some banks were told they need to raise more capital in order to be considered healthy. The results are scheduled to be released to the public Thursday.

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We know many banks are stressed. Tomorrow, we'll get one judgment on just how much. After spending the past couple of months doing stress tests on America's 19 biggest banks, federal regulators are ready to reveal the results. For weeks, there's been speculation on how many of those banks might fall short and on how much capital they'll need to raise to guard against future losses.

NPR's John Ydstie has more on what's expected in tomorrow's report.

JOHN YDSTIE: The goal of the stress tests was to figure out how the 19 big banks would fare if the economy got even worse than it's currently forecast -home prices falling another 20 percent for instance, unemployment rising beyond 10 percent.

Eugene Ludwig has spent plenty of time examining banks, as controller of the currency from 1993 to '98, and more recently as a bank consultant. He says a significant number of the 19 banks will need to raise their cushion against losses.

Mr. EUGENE LUDWIG (CEO, Promontory Financial Group): There will be the need for capital in, I would say, more than half. But it will be more I think, for many of them, should be characterized as topping up.

YDSTIE: That would mean at least 10 banks that would be required by the government to boost their capital. But Ludwig says given that it's insurance against the possibility of an even worse economy, it's a positive outcome and should be comforting to the public. He does acknowledge that a couple of the banks could be forced to raise serious amount of capital. So what's the total amount of money that banks will have to raise? Douglas Elliot of the Brookings Institution thinks it will be in the $100 to $200 billion range.

Mr. DOUGLAS ELLIOT (Financial Expert, Brookings Institution): If it's lower than that, it'll be a real sign that the regulators think the situation's better than we do. On the other hand, if it's more than that, say $200 billion, we're in trouble.

YDSTIE: In trouble, says Elliot, a former investment banker at J.P. Morgan, because regulators would be admitting that the banks need a whole lot more money, even though it's clear Congress has no intention of providing it. That could be very unsettling for the financial markets. The International Monetary Fund believes the banks will need much more. It says that together they might need as much as $500 billion in additional reserves.

Yesterday in Capitol Hill, Federal Reserve chairman, Ben Bernanke, disagreed. He said U.S. banks have already taken significant write-downs and made reserves against losses. And he expressed confidence the banks could raise the needed capital in the private financial markets.

Mr. BEN BERNANKE (Chairman, Federal Reserve): I've looked at the many of the banks and I believe that many of them will be able to meet their capital needs without further government capital.

YDSTIE: That suggests some will need more government help. That could come from the $110 billion left in the treasury's TARP bailout fund. Doug Elliot says a number of banks might also choose to raise capital levels by taking the government up on its offer to convert the preferred shares the treasury initially purchased in banks into common stock.

Mr. ELLIOT: Essentially what we will be doing is we'll be swapping a kind of loan for actual ownership of a part of the banks. So, it increases the taxpayers' risk, but it also increases the potential return.

YDSTIE: Taxpayers could make big gains if shares in the bank, which have been very depressed, rise significantly. But if they fall, taxpayers lose. Former controller of the currency, Ludwig, says taxpayers have an even broader interest at stake.

Mr. LUDWIG: It is not - shouldn't be judged simply by what the taxpayer recoups in terms of that money, but it's what it does to the overall economy in terms of job creation, activity in the economy and ultimately tax recoup. And I think that's how it should be judged.

YDSTIE: For bank shareholders, raising capital can be painful, because initially, when new shares are created, the value of their holdings are diluted. That's why many banks have been arguing in private talks, they don't need as much new capital as the regulators say they do. By yesterday, though, the terms were set and the banks were told how much capital to raise. We'll all learn the results late Thursday afternoon when Treasury Secretary Geithner and Fed Chairman Bernanke reveal them in a news conference.

John Ydstie, NPR News, Washington.

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Reports: Bank Of America Has $34B Capital Shortfall

Bank of America needs about $34 billion in additional capital, far more than previously expected, according to published reports. The Wall Street Journal and New York Times reported that government regulators are telling the Charlotte, N.C.-based banking giant that it needs the extra capital based on results of government stress tests.

Bank of America has been among the hardest hit banks in the credit crisis and ongoing recession. It has received more than $45 billion in government aid already and has come under heavy scrutiny in recent months for its acquisition of Merrill Lynch.

Citigroup Inc., Regions Financial Corp. and Wells Fargo & Co. have also been asked to raise money, according to people briefed on the results.

But at least three of the nation's 19 largest banks have passed the government stress tests. American Express Co., JPMorgan Chase & Co. and Bank of New York Mellon Corp. will not be asked to raise more capital, according to people briefed on the results, which are due to be released to the public on Thursday.

For weeks, there has been speculation on the number of banks that might fall short and on how much capital they'll need to raise to guard against future losses.

The goal of the stress tests was to figure out how the 19 banks would fare if the economy got even worse than is currently forecast — if home prices drop an additional 20 percent and unemployment rises beyond 10 percent. The jobless rate was 8.5 percent in March.

Eugene Ludwig has spent plenty of time examining banks, as comptroller of the currency from 1993 to '98 and more recently as a bank consultant. He says a significant number of the 19 banks will need to raise their cushion against losses. More than half of them will need additional capital, but for many of them, Ludwig says, "it should be characterized as topping up."

That would mean at least 10 banks will be required by the government to boost their capital. But Ludwig says given that the boost would provide insurance against the possibility of an even worse economy, it's a positive outcome and should be comforting to the public. He does acknowledge that a couple of the banks could be forced to raise serious amounts of capital.

Douglas Elliott of the Brookings Institution predicts that the banks will have to raise a total of $100 billion to $200 billion.

"If it's lower than that, it will be a real sign that the regulators think the situation's better than we do. On the other hand, if it's more than that, say $200 billion, we're in trouble," he said.

Elliott, a former investment banker at JPMorgan Chase, says regulators would be admitting that the banks need a whole lot more money even though it is clear Congress has no intention of providing it. And that combination could be very unsettling for the financial markets.

The International Monetary Fund predicts that the banks might need as much as $500 billion in additional reserves.

Testifying on Capitol Hill on Tuesday, Federal Reserve Chairman Ben Bernanke disagreed. He said U.S. banks have already taken significant write-downs and made reserves against losses. And he expressed confidence that the banks could raise the needed capital in the private financial markets.

"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," he said.

That suggests that some will need more government help. It could come from the $110 billion left in the Treasury's Troubled Asset Relief Program bailout fund.

Elliott says a number of banks might also choose to raise capital levels by taking the government up on its offer to convert into common stock the preferred shares the Treasury initially purchased in banks.

"Essentially what we'll be doing is swapping a kind of loan for actual ownership of a part of the bank," he says. "So it increases the taxpayers' risk but also increases the potential return."

Taxpayers could make big gains if shares in the banks, which have been very depressed, rise significantly. But if they fall, taxpayers lose. Ludwig, a former comptroller of the currency, says taxpayers have an even broader interest at stake.

"It ... shouldn't be judged simply by what the taxpayer recoups in terms of that money. But it's what it does for the overall economy, in terms of job creation, activity in the economy, and ultimately tax recoupment, and I think that's how it should be judged," he says.

For bank shareholders, raising capital can be painful because initially, when new shares are created, the value of their holdings are diluted. That's why many banks have been arguing in private talks that they don't need as much new capital as the regulators say they do.

By Tuesday, though, the terms were set and the banks were told how much capital to raise. The results are due to be released to the public Thursday afternoon, when Treasury Secretary Timothy Geithner and Fed Chairman Bernanke reveal them in a news conference.

The banks that are found to need more capital after the stress tests will have one month to come up with a plan to raise the additional resources, federal regulators said Wednesday. The government said that after the results are released, the banks found to need more capital will have until June 8 to get a plan approved by their regulators.

With reporting from NPR's John Ydstie and The Associated Press

Big Banks Get Stress Test Results

The nation's 19 largest banks got the final results from the government's stress tests on Tuesday. Some were told they need to raise more capital in order to be considered healthy. And others learned they are in good enough shape to withstand an even worse recession.

The results are scheduled to be released to the public Thursday by Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke.

The stress tests are an attempt by the government to measure how banks would fare if the economy got significantly worse, specifically, if home prices fell another 20 percent and the unemployment rate rose to 10.3 percent. The jobless rate was 8.5 percent in March.

The results have been eagerly awaited by investors. And there's been no shortage of rumors and anonymously sourced reports about which banks will need to add reserves. Citigroup, Bank of America and Wells Fargo are on the list of banks that may need more capital, according to news reports.

The banks have orders not to talk about the tests, but Eugene Ludwig, who regulated banks as comptroller of the currency in the mid-1990s, says he believes at least 10 of the 19 banks will be told to raise capital. Though most of them, he says, will likely just need a modest topping up.

"A couple of them will need some serious capital, but the belief is that they can get it either in the marketplace or will get it from the government," he says. "So, I think it will by and large be comforting to the public."

Ludwig did not want to mention any institutions by name since a number of the 19 big banks are clients of his consulting firm Promontory Financial Group.

Nowhere are the stress test results more anxiously awaited than on Capitol Hill, where lawmakers have made it clear they're not interested in giving the banks more money.

At a hearing Tuesday before the Joint Economic Committee, the Fed's Bernanke declined to provide a preview of Thursday's report. But he did answer this question from Rep. Carolyn Maloney (D-NY) about whether Congress would be asked to pony up more funds in addition to the $110 billion that remains in the Troubled Asset Relief Program.

"Well, I would leave that to the administration," Bernanke said. "I think that they've just recently indicated they don't think there is a near-term ... need."

A number of analysts have interpreted the administration's comments as an indication that the stress tests will show the nation's banks are basically healthy.

Douglas Elliott, a former investment banker who is now a fellow at the Brookings Institution, says he believes the regulators will conclude that all together the 19 big banks will need to raise between $100 billion and $200 billion in capital.

"If it's lower than that, it'll be a real sign that the regulators think the situation is better than we do," Elliott says. "On the other hand, if it's more than that ... we're in trouble because the political constraints on going higher are strong."

Investors seem to believe the results of the stress tests will be quite positive. For much of the past couple of weeks, shares in many of the big banks have risen. That's happened even though adding capital could dilute the value of those shares, at least temporarily.

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