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. But American Express, JPMorgan Chase and Bank of New York Mellon reportedly have passed government stress tests.
NPR logo Reports: Bank Of America Has $34B Capital Shortfall

Reports: Bank Of America Has $34B Capital Shortfall

NPR's John Ydstie Reports On The Stress Tests

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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