Validity of Bank Stress Test Questioned
Some of the nation’s largest banks will be scrambling to demonstrate that they can raise capital after results of government stress tests leaked out, showing many need more funds. The Treasury Department will officially release results later Thursday.
The tests were designed to gauge whether any of the nation’s 19 largest banks would need more capital to survive a deeper recession. It turns out many of the banks do: Wells Fargo & Co., Citigroup Inc. and Bank of America Corp. all need billions more, regulators have told them.
The public nature of the assessments and Thursday’s planned announcement raised questions among some critics about whether the findings will reflect the banks’ actual conditions.
The tests put banks through two scenarios: one that reflected expectations about the current recession and another that envisioned a recession deeper than what analysts predict.
Citigroup will need to raise about $5 billion, according to a government official briefed on the results who spoke on the condition of anonymity because he was not authorized to discuss the matter. Earlier news reports had put that dollar figure closer to $10 billion.
Regions Financial Corp. will also need to raise more money, according to people briefed on the results, as will Bank of America and Wells Fargo.
Bank of America stock rose Wednesday after reports that the Charlotte, N.C.-based company would need to collect $34 billion in additional capital. The New York Times and Wall Street Journal reported the figure. The Journal cited unidentified people familiar with the situation, while the Times quoted a bank executive.
Stress tests have long been a part of the bank regulation system. They help regulators decide how to supervise banks and aid banks in deciding how to limit their risk. But those conversations between banks and regulators normally take place behind closed doors.
In recent weeks, the government’s unprecedented decision to publicly release bank-test results has fanned speculation, with analysts predicting the findings and investors staking out trading positions.
Critics are concerned that all the attention could make the tests much less effective. They say regulators seem so intent on maintaining public confidence in the banks that the results will have to say the banks are basically healthy.
Officials have said they will not let any of the 19 institutions fold. That makes it almost impossible for them to say anything about a bank that would threaten its survival, since a flight by investors could force the government to step in with additional bailout money — something the Treasury Department hopes to avoid.
“There is a real question as to the legitimacy of these results,” said Jason O’Donnell, senior analyst at Boenning & Scattergood Inc.
The stress tests are a key part of the Obama administration’s plan to stabilize the financial industry.
The tests estimated how much value the banks’ loans would lose as consumers and businesses faced more trouble repaying loans.
The first test scenario envisioned unemployment reaching 8.8 percent in 2010 and housing prices dropping another 14 percent this year. The second imagined unemployment rising to 10.3 percent next year and homes losing another 22 percent of their value this year.
But economic assumptions have changed since the tests were designed in February. Unemployment already has surpassed the 8.4 percent the test’s first scenario predicts for 2009, which leaves some analysts wondering whether the tests were harsh enough.
The government is asking banks to keep their capital reserve ratios above a certain level so they can continue lending even if the economic picture darkens.
The banks that need more capital will have until June 8 to come up with a plan to raise the additional resources and have the plan approved by their regulators, officials said Wednesday.
Banks will have several options for increasing their capital. Some will be able to close the gap by converting the government’s debt into common stock. Others will have six months to attempt to raise money from private investors. If they cannot do it, the government will provide money from its $700 billion financial system bailout.
Representatives for American Express Co., JPMorgan Chase & Co., Bank of New York Mellon Corp., Citigroup and Regions Financial would not comment on the tests.
The remaining stress-tested banks are: Goldman Sachs Group Inc., Morgan Stanley, MetLife Inc., PNC Financial Services Group Inc., U.S. Bancorp, GMAC, SunTrust Banks Inc., State Street Corp., Capital One Financial Corp., BB&T Corp., Regions Financial Corp., Fifth Third Bancorp and Keycorp.
Financial stocks surged Wednesday amid reports on the stress tests. Bank of America gained 17 percent, Citigroup surged 16 percent and Wells Fargo gained 15 percent.
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Sara Lepro reported from New York. Associated Press writers Jeannine Aversa and Martin Crutsinger in Washington and Stephen Bernard in New York contributed to this report.
5/7/2009 12:03 AM DANIEL WAGNER AP Business Writers WASHINGTON