The results of the government's stress tests on the nation's 19 biggest banks are being made public Thursday. Investors, taxpayers and members of Congress are eagerly awaiting results. The tests are aimed at determining whether the banks are healthy enough to weather a severe recession.
Like nervous parents who've been pacing outside a sick child's hospital room waiting for test results, bank investors are getting some qualified good news. While some of the biggest banks are not exactly healthy, at least it appears they're going to live.
Analyst Matthew Warren of Morningstar says that was enough to send bank stocks climbing sharply Wednesday.
"There's been a big rally in bank stocks from the March 9th or so lows. And I think you can attribute part of that to the stress tests, actually, ironically," he says.
The "stress tests" conducted by the Federal Reserve and other regulators are designed to show how much more money banks would need to keep lending, even if the economy turns worse. The Fed stresses this is a "what if" exercise, not a prediction of what's actually going to happen.
Bank lobbyist Scott Talbott of the Financial Services Roundtable says there's some comfort in knowing that a bank can weather the worst.
"I think the markets understand that now, and as the results begin to roll out, they are either not as bad as expected, or are as expected. So it's sort of a soft landing for the stress tests," he says.
Some banks will have to raise more capital, including Wells Fargo, Citigroup and Bank of America, which reportedly needs to boost its capital cushion by a whopping $34 billion. But even Bank of America saw its stock price soar by 17 percent Wednesday.
Fed Chairman Ben Bernanke told lawmakers this week that banks have a variety of ways to raise the money they need, without coming back to the government for additional help.
"To the extent that there are banks that need capital, our hope is that many of them will be able to raise that capital through either private equity offers or through conversions and exchanges of existing liabilities to strengthen their capital bases," he said.
Bernanke means that banks could convert the loans they got from the government's Troubled Asset Relief Program into common stock. One downside of that approach is that it could make the federal government the biggest shareholder in some of the banks.
The healthiest banks — including JPMorgan Chase and American Express — don't need additional capital. Some of them are eager to move in the opposite direction, repaying the TARP money they borrowed from the government.
Warren, the analyst, says that would save the banks the cost of paying interest on the government loans. And it would free them from uncomfortable rules limiting executive pay.
"The TARP money went from being a signal of strength to really a signal of weakness, especially as we've moved into the stress test phase. So, now it's a signal of strength to be able to pay it back. And I think some of these stronger banks would like to do that as quickly as possible and move on," Warren says.
But the government is saying "not so fast." Before they repay the TARP money, big banks will first have to show they can borrow money elsewhere without a government guarantee. Warren says regulators don't want banks to wind up strapped and looking for additional bailouts later.
"If you're going to let the banks repay the TARP, you want them to be able to stand on their own, and not have to come back to the government and ask for that money back — especially considering that Congress might not cooperate," he says.
But Talbott, the bank lobbyist, says he hopes regulators won't raise the hurdles too high for banks that want to repay TARP money. He says the idea that some banks are even considering repayment and reporting quarterly earnings is a sign of how far the financial sector has come.
"Six months ago, who'd have thought we'd be talking about earnings or repayment of TARP? But yet here we are," he says. "And I think those are all positive signs. And repayment of TARP should be viewed as a positive step that the institution is strong enough to be able to return that money, and that the program is working again and the economy is being restored."
A healthy banking system is critical to a broader economic recovery. Warren says that while banks aren't there yet, the stress tests offer some reassurance.
"Some of the tough underlying realities are still there," he says. "So you can't get too excited. But it's good to know that at least the large banks are going to be healthy and operating in a more normal way."
Banks that need additional capital will have 30 days to come up with a plan, and then five more months to raise the money.