May 12th, 2009
Banks’ Stress Test Results are Released
The government released the results of a two month effort to gauge the financial health and fiscal ability of the top 19 banks in America. Of those banks, 10 banks were told that they lacked the reserves and to raise additional capital, most notably Bank of America, Wells Fargo, GMAC, and Citigroup. The total amount of capital recommended by the federal government is nearly $75 billion.
This additional capital is to be raised without the government’s assistance, and banks have nearly six months to comply. Banks are exploring options such as offering common-stock shares to the public, selling off debt, assets or business lines, as well as raising equity from private sources. However, some banks were given a cleaner bill of health, the government not require them to raise any capital. These banks include Bank of New York Mellon, American Express, Capital One, and JP Mortgage Chase. The full scorecard can be found here and you can read the entire 38 page report here.
After the release of results, stocks surged upwards, even for banks that were being required to raise additional capital, such as Bank of America. This was seen as a sign that the worst was behind us; banks have weathered the storm and now have sufficient funds to stay afloat. However, the stress tests results state that 10 of 19 of the largest US banks still require nearly $75 billion additional capital. That doesn’t sound like good news, but the market responded positively to this news, which is counterintuitive. The stress tests were intended to bring clarity to the financial health of the US banks, but instead have continued to keep investors and consumers in a “wait and see” mode. For a more detailed read on the results of the tests, WSJ has a great article about the results.
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