Fed Stress Test Results May Show 10 U.S. Banks Need Capital

Fed Stress Test Results May Show 10 U.S. Banks Need Capital


May 5 (Bloomberg) -- The Federal Reserve plans to deliver results of stress tests on U.S. banks to executives today that may show about 10 companies need additional capital to weather a deeper recession, people familiar with the matter said.

Banks are formulating plans for filling their capital requirements, much of which would likely come from conversions of preferred shares, the people said. Many of the 19 lenders under review and the government are set to discuss publicly the examinations after markets close May 7, the people said.

Financial shares jumped the most in almost a month yesterday on optimism about the tests. 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.

“Maybe the capital that’s required from these tests is going to be smaller than the market had been anticipating,” said Blake Howells, an analyst at Becker Capital Management, which oversees $1.7 billion in Portland, Oregon, and owns shares of U.S. Bancorp and KeyCorp, referring to the stock rally.

Still, “for the stress test to have any sort of legitimacy, some of the banks are going to have to raise capital,” he said.

Fed Meeting

Fed spokeswoman Michelle Smith declined to comment. The Fed’s Board of Governors met late on May 3rd to discuss the stress tests, according to a posting on the central bank’s Web site, the second Sunday evening meeting on the matter in three weeks.

Last week, the Fed delayed the release of the tests, originally scheduled for yesterday, as banks challenged some of the conclusions. Citigroup Inc. and Bank of America Corp. were among the banks found to need additional capital, people familiar with the matter have said.

Both firms disputed the Fed’s determination. Yesterday, Bank of America gained 19 percent after the company denied it was working on a plan to raise $10 billion. Citigroup rose 7.7 percent.

A person familiar with Citigroup’s plans said the bank wasn’t likely to need new taxpayer cash and was focusing on converting government shares and getting capital from private investors to satisfy regulators.

The number of banks deemed to need more capital has increased from six to eight a week ago, after regulators boosted their target for the reserves the firms must hold, according to a person familiar with the matter.

Capital Ratio

Officials favor tangible common equity equal of about 4 percent of a bank’s assets, up from a 3 percent goal earlier in the process, two people with knowledge of the deliberations said last week.

While banks are trying to avoid the taint of taking federal funds -- and the potential pay restrictions and executive firings that come with it -- the government will also benefit by handing out less cash. Not including repayments, the Treasury has about $110 billion left in the $700 billion Troubled Asset Relief Program that Congress passed last October.

Lawmakers have repeatedly said they won’t approve any more funds. Some lenders, including Goldman Sachs Group Inc., have said they intend to pay back as soon as possible the TARP money they received last year.

President Barack Obama’s spokesman said yesterday that some banks will “undoubtedly” need more capital but the administration expects them to be able to get it in private markets.

TARP Funds

“The administration doesn’t believe we need to go to Congress right now” to seek more money to rescue banks, White House press secretary Robert Gibbs said at his daily briefing.

For those institutions needing more capital, “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 added.

Such a result may not appease critics, including Nobel prize laureate in economics Joseph Stiglitz, who have suggested temporary government takeovers to cleanse banks’ balance sheets.

“Rather than financial or economic fixes, it looks like the Treasury really doesn’t have enough money to address the situation, and therefore is going back to this idea that somehow if we change preferred into common, magically the problem goes away,” said Joseph Mason, a banking professor at Louisiana State University in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency.

The 19 firms include Citigroup, Bank of America, Goldman Sachs, GMAC LLC, MetLife Inc., Fifth Third Bancorp and Regions Financial Corp. The banks in the test hold two-thirds of the assets and more than half of the loans in the U.S. banking system, according to a Fed study released April 24.

Regulators are pushing higher minimum capital levels for the banks to determine whether they can survive a worsening recession. Tangible common equity can be boosted by converting preferred shares to common equity.

BLOOMBERG