$150 billion extra capital needed by half of top 20 US banks to ride property's continued fall
Dave Tug
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View all articles by Dave Tug$150 billion extra capital needed by half of top 20 US banks to ride property's continued fall
About 10 of the 19 largest U.S. banks being stress tested will be instructed by regulators to
raise more capital, according to a source familiar with official talks.
The banks have been negotiating with their regulators about the depth of their capital needs,
should the recession prove to be deeper and longer than anticipated. Markets have been anxiously
anticipating the results, which will differentiate the strongest banks from those still expected
to sustain considerable credit losses.
The exact roster of banks needing to build their capital positions is still unclear. Banks are
expected to be briefed on the official results today. The Federal Reserve and Treasury
Department will also tell them how policymakers plan to publicly unveil the market-sensitive
results, the source said, speaking anonymously because the discussions are private.
The Treasury and Fed declined to comment on how many banks will be directed to raise more
capital.
The largest U.S. banks have spent recent days making the case to regulators that they have the
financial firepower to withstand a deeper recession, as Bank of America on Monday denied a
report it was trying to raise capital of $10 billion (£6.7 billion).
Some industry insiders worry the stress test results come at a time when the sector is starting
to see positive effects from some surprisingly strong first-quarter earnings figures.
"I think the great risk there is that you create some new uncertainty and concerns at the very
time the financial condition of the banking industry is turning for the better," Wayne
Abernathy, an executive at the American Bankers Association and a former Treasury official said
earlier on Monday.
Banks found to be in need of more capital will have to embark on a recovery plan that could
involve converting preferred stock, raising fresh private capital, or accepting government help
-- assistance which comes with close scrutiny from Congress that will certainly be unwelcome on
Wall Street.
Banks found to need capital will likely want to lay out capital-raising plans quickly to avoid
being punished by panicky investors, although regulators won't require them to put a plan on the
table immediately.
The emphasis will be placed on raising capital from within or private outlets. Pouring more
public money into banks would put political pressure on President Barack Obama, whose
administration is keen to avoid asking lawmakers to approve more bailout money for shortfalls
that some analysts think may reach $150 billion.
The Treasury could soon have more funds on hand to infuse into weaker institutions, as officials
estimate that stronger banks will return at least $25 billion doled out from the government's
financial rescue fund. However, they want to ensure enough capital remains in the system as a
whole.
Policymakers are expected to soon lay out conditions banks would need to meet to return funds.
White House spokesman Robert Gibbs on Monday said that the administration does not see a need to
ask the U.S. Congress for additional funds to support banks, and that the banks will be
encouraged to seek extra funds through private sources.
"I think everyone involved will be looking for banks to raise this through either private means
or the selling of some assets that they have or that they control," Gibbs said.
He also said that the banks themselves will determine which steps they will take to raise
capital. "They'll have a certain amount of time to put together a plan that meets ... the test
of regulators to ensure that stability," Gibbs told reporters.
Some banks have complained that regulators were too harsh in their assessment over how much of a
buffer they need to absorb future losses, and were underestimating profitability.
"The banking system can handle an awful lot of loss and be okay," JPMorgan Chase & Co Chief
Executive Jamie Dimon said on a conference call, adding that he agreed with legendary investor
Warren Buffett who said many banks have enough earning power to make up for future losses.
Bank of America Corp shares rose more than 19% after it denied a Financial Times report that it
was working on plans to raise fresh funds to fill a $10 billion capital hole.
The KBW Banks index, which includes about two dozen large banks including Bank of America, rose
almost 15%.
But investors remained on edge as Thursday's deadline neared.
The Associated Press reported that
Wells Fargo was asked to raise more capital after its stress test.
Citigroup has also been identified as a bank needing to raise its capital buffer. The firm will
need to boost its common equity by up to $10 billion, a person familiar with the matter said
Monday.
Bank of America, Wells Fargo and JPMorgan did not immediately respond late on Monday to a
request for comment. An official from Citigroup declined comment.
Ratings agency Standard & Poor's said it may lower the counterparty credit ratings of 22
financial firms -- including Bank of America, Wells Fargo and Citigroup -- based on results of
its own stress testing.
"These rating actions identify companies that we believe have at least a one-in-two likelihood
of a ... downgrade within 90 days," S&P said in a statement. "That said, we believe that most
rated institutions will be able to earn their way out of these credit losses during the cycle."
As analysts crunched their own numbers, at least one found that balance sheets may not be in as
bad shape as feared.
David Trone, a Fox-Pitt Kelton bank analyst, said he expected Thursday's results to show a few
banks were in need of more capital, although the shortfalls would probably be modest and "bank
stocks won't collapse."
The U.S. Federal Reserve and other regulators have spent the past few weeks poring over holdings
of the 19 largest banks, examining real estate and other assets that have lost significant value
as the housing market crashed.
The process aimed to gauge how banks would hold up if the economy were to continue its steep
descent and home prices fell another 22% this year and 7% in 2010.
The institutions undergoing stress tests include Citigroup Inc, Bank of America, Goldman Sachs
Group Inc, JPMorgan Chase & Co, Morgan Stanley, MetLife Inc, Wells Fargo & Co, PNC Financial
Services Group Inc, US Bancorp, Bank of NY Mellon Corp, SunTrust Banks Inc, State Street Corp,
Capital One Financial Corp, BB&T Corp, Regions Financial Corp, American Express Co, Fifth Third
Bancorp, KeyCorp and GMAC LLC.
Commercial property for sale or rent in the UK - find lettings, investment property and commercial property agents with ukbusinessproperty
raise more capital, according to a source familiar with official talks.
The banks have been negotiating with their regulators about the depth of their capital needs,
should the recession prove to be deeper and longer than anticipated. Markets have been anxiously
anticipating the results, which will differentiate the strongest banks from those still expected
to sustain considerable credit losses.
The exact roster of banks needing to build their capital positions is still unclear. Banks are
expected to be briefed on the official results today. The Federal Reserve and Treasury
Department will also tell them how policymakers plan to publicly unveil the market-sensitive
results, the source said, speaking anonymously because the discussions are private.
The Treasury and Fed declined to comment on how many banks will be directed to raise more
capital.
The largest U.S. banks have spent recent days making the case to regulators that they have the
financial firepower to withstand a deeper recession, as Bank of America on Monday denied a
report it was trying to raise capital of $10 billion (£6.7 billion).
Some industry insiders worry the stress test results come at a time when the sector is starting
to see positive effects from some surprisingly strong first-quarter earnings figures.
"I think the great risk there is that you create some new uncertainty and concerns at the very
time the financial condition of the banking industry is turning for the better," Wayne
Abernathy, an executive at the American Bankers Association and a former Treasury official said
earlier on Monday.
Banks found to be in need of more capital will have to embark on a recovery plan that could
involve converting preferred stock, raising fresh private capital, or accepting government help
-- assistance which comes with close scrutiny from Congress that will certainly be unwelcome on
Wall Street.
Banks found to need capital will likely want to lay out capital-raising plans quickly to avoid
being punished by panicky investors, although regulators won't require them to put a plan on the
table immediately.
The emphasis will be placed on raising capital from within or private outlets. Pouring more
public money into banks would put political pressure on President Barack Obama, whose
administration is keen to avoid asking lawmakers to approve more bailout money for shortfalls
that some analysts think may reach $150 billion.
The Treasury could soon have more funds on hand to infuse into weaker institutions, as officials
estimate that stronger banks will return at least $25 billion doled out from the government's
financial rescue fund. However, they want to ensure enough capital remains in the system as a
whole.
Policymakers are expected to soon lay out conditions banks would need to meet to return funds.
White House spokesman Robert Gibbs on Monday said that the administration does not see a need to
ask the U.S. Congress for additional funds to support banks, and that the banks will be
encouraged to seek extra funds through private sources.
"I think everyone involved will be looking for banks to raise this through either private means
or the selling of some assets that they have or that they control," Gibbs said.
He also said that the banks themselves will determine which steps they will take to raise
capital. "They'll have a certain amount of time to put together a plan that meets ... the test
of regulators to ensure that stability," Gibbs told reporters.
Some banks have complained that regulators were too harsh in their assessment over how much of a
buffer they need to absorb future losses, and were underestimating profitability.
"The banking system can handle an awful lot of loss and be okay," JPMorgan Chase & Co Chief
Executive Jamie Dimon said on a conference call, adding that he agreed with legendary investor
Warren Buffett who said many banks have enough earning power to make up for future losses.
Bank of America Corp shares rose more than 19% after it denied a Financial Times report that it
was working on plans to raise fresh funds to fill a $10 billion capital hole.
The KBW Banks index, which includes about two dozen large banks including Bank of America, rose
almost 15%.
But investors remained on edge as Thursday's deadline neared.
Wells Fargo was asked to raise more capital after its stress test.
Citigroup has also been identified as a bank needing to raise its capital buffer. The firm will
need to boost its common equity by up to $10 billion, a person familiar with the matter said
Monday.
Bank of America, Wells Fargo and JPMorgan did not immediately respond late on Monday to a
request for comment. An official from Citigroup declined comment.
Ratings agency Standard & Poor's said it may lower the counterparty credit ratings of 22
financial firms -- including Bank of America, Wells Fargo and Citigroup -- based on results of
its own stress testing.
"These rating actions identify companies that we believe have at least a one-in-two likelihood
of a ... downgrade within 90 days," S&P said in a statement. "That said, we believe that most
rated institutions will be able to earn their way out of these credit losses during the cycle."
As analysts crunched their own numbers, at least one found that balance sheets may not be in as
bad shape as feared.
David Trone, a Fox-Pitt Kelton bank analyst, said he expected Thursday's results to show a few
banks were in need of more capital, although the shortfalls would probably be modest and "bank
stocks won't collapse."
The U.S. Federal Reserve and other regulators have spent the past few weeks poring over holdings
of the 19 largest banks, examining real estate and other assets that have lost significant value
as the housing market crashed.
The process aimed to gauge how banks would hold up if the economy were to continue its steep
descent and home prices fell another 22% this year and 7% in 2010.
The institutions undergoing stress tests include Citigroup Inc, Bank of America, Goldman Sachs
Group Inc, JPMorgan Chase & Co, Morgan Stanley, MetLife Inc, Wells Fargo & Co, PNC Financial
Services Group Inc, US Bancorp, Bank of NY Mellon Corp, SunTrust Banks Inc, State Street Corp,
Capital One Financial Corp, BB&T Corp, Regions Financial Corp, American Express Co, Fifth Third
Bancorp, KeyCorp and GMAC LLC.
Commercial property for sale or rent in the UK - find lettings, investment property and commercial property agents with ukbusinessproperty
