Stress Tests Results: 10 Banks May Have to Raise CashThe Federal Reserve's stress test results may show that 10 bank holding companies will need more money to stay above the water line. Banks are getting more of the results today from the Federal Reserve, and the examination results will be released to the public on May 7 after the markets close.
Bank executives may be asked to come up with plans for filling the additional capital requirements. Most would likely come from the conversion of preferred shares. The Treasury and regulators have presented different options for the banks to shore up their books without taking taxpayer money, including selling assets, seeking private capital and converting previous government investments from preferred to common shares.
The Federal Reserve's Board of Governors met late on May 3 to discuss the stress tests -- the second Sunday meeting on the tests in the last three weeks. The Federal Reserve delayed the release of the tests last week because some of the banks had challenged their preliminary results. Bank of America and Citigroup were among the banks that were found needing added capital reserves, sources close to the board said. But both banks were firmly disputing the findings. Bank of America denied on Monday that it had been making plans to raise $10 billion.
Federal Reserve officials have said that the 19 banks should have common equity that is equal to 4 percent of the bank's assets. If the banks are able to raise this capital without asking for more federal money, it will be a win for both the banks and the Treasury, which has $110 billion left of the $700 billion TARP money that Congress granted last fall.
The 19 bank holding firms include Citigroup, Bank of America, Goldman Sachs, GMAC, MetLife, Fifth Third Bancorp and Regions Financial Corp. These banks hold two-thirds of the assets and more than half of all the loans in the country's banking system, according to Federal Reserve data. According to Peter Vinella, at LECG, a risk management consulting firm, the stress testing they're doing now is somewhat different because they're looking at macro economic factors, "but its not looking at the tightly integrated nature of the financial services industry and how tightly wound many institutions are to one or more of these big banking firms and dependent upon them. For example, if JP Morgan Chase goes under, it would take another 2000 banks with it, because it operates as an outsourcer for those banks' checking systems and wire systems."
Vinella says the fact is there is a lot of plumbing underneath the floors between all of these institutions that are unseen and not taken into account. If it breaks down, it affects all of those who are receiving that water. "It is more complicated and more complex and the regulators and regulations have not kept up with it, the lay people don't understand it, and the federal government has done a poor job of explaining it," he adds.
Vinella's comments were made during an exclusive interview with ISMG on the stress tests and how they will affect the financial services industry.