The government's long-awaited "stress-test" results have found that 10 of the nation's 19 largest banks need a total of about $75 billion in new capital to withstand losses if the recession worsened.
The Federal Reserve's findings, released Thursday, show the financial system, like the overall economy, is healing but not yet healed.
Some of the largest banks are stable, the tests found. But others need billions more in capital — a signal by regulators that the industry is vulnerable but viable. Government officials have said a stronger banking system is needed for an economic rebound.
Officials hope the tests will restore investors' confidence that not all banks are weak, and that even those that are can be strengthened. They have said none of the banks will be allowed to fail.
"I think why the results were encouraging today is that it showed overall capital in the largest banks is strong and can withstand a great deal of loss in the next two years," John Dugan, comptroller of the currency, whose office supervises more than 1,600 federally chartered commercial banks, told NPR. "But at the same time, common equity, one kind of capital, does need to be increased in some banks, and these banks are already taking steps to achieve that result without, we hope, resorting to government capital."
The banks that need more capital will have until June 8 to develop a plan and have it approved by their regulators.
Among the 10 banks that need to raise more capital, the tests said Bank of America Corp. needs by far the most: $33.9 billion. Wells Fargo & Co. requires $13.7 billion, GMAC LLC $11.5 billion and Citigroup Inc. $5.5 billion.
Some of the firms that need more capital already are announcing their strategies. Morgan Stanley, which the government says needs $1.8 billion in new capital, said it plans to raise $5 billion. That will include $2 billion in common stock.
The tests found that if the recession were to worsen, losses at the 19 stress-tested firms during 2009 and 2010 could total $600 billion.
"Looking at the big picture, you can say that things aren't so bad for the financial industry as a whole," said Kevin Logan, chief U.S. economist at Dresdner Kleinwort.
But Logan said attracting fresh capital will be a challenge for banks that need it.
"The banking industry is not going to make a lot of money going forward, and that's a dilemma for keeping banks solvent and getting them lending," he said.
But Dugan told NPR that he thinks banks have been lending.
"It's been overstated the extent to which people have suggested that they haven't been lending. That's not true," he said. "The data do not bear that out. On the other hand, I believe that increased confidence in the banking system helps the banks, and increased capital buffer gives them more capacity to take the kinds of prudent risks we want to see them take."
Financial stocks surged in after-hours trading, after the report was released at 5 p.m. Citigroup shares jumped 8.4 percent to $4.13, while State Street rose 7.3 percent to $40.60. Earlier, the markets had been down.
The government's unprecedented decision to publicly release bank exams has led some critics to question whether the findings are credible. Some said regulators seemed so intent on sustaining public confidence in the banks that the results would have to find the banks basically healthy, even if some need to raise more capital.
Jaidev Iyer, a former risk management chief at Citigroup, said regulators are playing to public expectations, which could put the government in the role of creating "winners and losers."
Because the government has said it won't let any firm fold, that could put taxpayers on the hook more than a confidential test would have, he said.
"If there is, in fact, no appetite to let losers fail, then the real losers are the market at large, the government and the taxpayers," Iyer said.
In the tests, the Fed put banks through two scenarios for what might happen to the economy.
One reflected forecasters' current expectations about the recession. It assumed unemployment will reach 8.8 percent in 2010 and house prices would decline by 14 percent this year.
The second scenario imagined a worse-than-expected downturn: Unemployment would hit 10.3 percent and house prices would drop 22 percent.
The steeper downturn would make it harder for consumers and businesses to repay loans, which would cause banks' assets to lose value. The government is forcing the banks to keep their capital reserves up so they can keep lending even if the economic picture darkens.
But some analysts questioned whether the tests were rigorous enough. Economic assumptions have changed since the test was designed in February. The U.S. jobless rate has risen to 8.5 percent and is projected to go higher this year.
"The assumptions the government has used are likely not to be completely accurate," said Jason O'Donnell, a bank analyst with Boenning & Scattergood Inc.
From NPR and wire reports.