Stress Tests Show 10 Banks Need To Raise About $75 Bln.

Thu. May 07, 2009; Posted: 06:48 PM

(RTTNews) - U.S. bank regulators said Thursday that about half of the country's biggest financial institutions need to improve their capital positions in order to ensure that they can weather a further downturn in the economy.

The results of the government's "stress test" showed that 10 of the 19 banks tested need to raise a total of $74.6 billion. The banks involved in the exercise account for two-thirds of the assets and more than half the loans in the U.S. banking system.

The stress tests were set up as a "what if" scenario to see if the banks could endure a further deterioration in the economy.

"The results released today should provide considerable comfort to investors and the public," Federal Reserve Chairman Ben Bernanke said.

Treasury Secretary Timothy Geithner added that the tests were "an unprecedented test of the broader health of our nation's banks."

"What's really important about this is the level of transparency and clarity it will bring to the banking system," he said. "It's a level of disclosure that goes well beyond what you typically see â€¦ [and will] make it easier for banks to raise capital from private sources â€¦. [and] pay the government back."

Nearly all the banks had enough of what was known as Tier 1 capital in order to weather the hypothetical situation that examiners had set up, Bernanke explained. However, many of the firms need to improve their capital structure to put greater emphasis on common equity, he explained. This type of capital provides the best protection during periods of stress.

The stress tests were conducted by the Federal Reserve, the Office of Comptroller of the Currency and the Federal Deposit Insurance Corporation.

The results show that company that needs to raise the most funds is Bank of America, which requires $33.9 billion. The figure conforms with reports that have come out over the last couple days, as results of the stress tests have leaked to the media.

Wells Fargo and GMAC also require capital injections of more than $10 billion, authorities said. The stress test shows Wells Fargo needs $11.5 billion, while GMAC, the financing company associated with auto maker General Motors, needs $11.5 billion.

Before the stress test results were revealed, Wells Fargo announced that it planed to offer $6 billion in common stock to the public.

Authorities said that companies need to come up with a plan to raise the additional capital over the next 30 days. The plan will be approved by the firm's primary supervisor and developed in consultation with the FDIC and the U.S. Treasury.

The companies need to put their capital improvement plans into effect over the next 6 months.

Companies can actively seek to raise new capital from private sources, regulators said, as well as restructure current capital instruments. The banks may also choose to raise funds by selling assets, or restricting dividends and stock repurchases.

Bernanke explained that the new capital requirements for the financial firms are "absolute targets â€¦ they cannot meet their targets by reducing lending."

The Fed chairman also stressed that the stress tests will not be extended to other banks or repeated in the near future.

"This is a one-time exercise â€¦ to assure that they will be well capitalized and lending even in this adverse scenario," he said. "This is not a new standard. â€¦ This is not an exercise we're going to repeat all the time."

In response to the stress test results, Goldman Sachs noted that it plans on repaying the funds it received under the government's Troubled Asset Relief Program, or TARP.

The TARP was set up last year to prop up the country's financial system after big bets on mortgage-related assets pushed many institutions toward collapse.

State Street said that it plans to repay the TARP money that it received as well.

Bank of New York Mellon also expressed a desire to give back the relief money, saying that the stress test results will hopefully allow it to accelerate the repayment process.

For full details on Bank Of America Corp (BAC) click here. Bank Of America Corp (BAC) has Short Term PowerRatings of 5. Details on Bank Of America Corp (BAC) Short Term PowerRatings is available at This Link.

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