stress test

or Most Banks, Not Too Stressful
Joshua Zumbrun and Liz Moyer, 05.07.09, 06:25 PM EDT
Federal regulators determine 10 of 19 big banks need to raise capital; BofA, Wells Fargo and Morgan Stanley to sell new shares.

WASHINGTON, D.C. -- Federal regulators have determined that after a relatively successful first three months of 2009, the largest 19 banks only need to raise $75 billion to remain well-capitalized through a prolonged downturn.

The government's so-called "stress tests" relied on estimates of how different classes of loans would perform in a prolonged recession, and then evaluated the portfolios of the 19 largest banks to determine how large their losses might be. The results will require some banks to raise additional common equity as a buffer against recession.

The banks that do not need additional capital will be able to begin the process of repaying TARP funds, provided they demonstrate an ability to raise private debt.

The government has determined that nine banks do not need additional funds: American Express ( AXP - news - people ), BB&T ( BBT - news - people ), Bank of New York Mellon ( BK - news - people ), Capital One ( COF - news - people ), Goldman Sachs ( GS - news - people ), JPMorgan Chase ( JPM - news - people ), MetLife ( MET - news - people ), State Street ( STT - news - people ) and US Bancorp ( USB - news - people ).

Of the $75 billion the other 10 banks need to raise, the bulk of the obligation falls on Bank of America ( BAC - news - people ), which was judged to require $33.9 billion; GMAC ( GJM - news - people ), which needs $11.5 billion; and Wells Fargo ( WFC - news - people ), which needs $13.7 billion according to the tests. Citigroup ( C - news - people ) needs $5.5 billion.

Fifth Third Bancorp ( FITB - news - people ), KeyCorp ( KEY - news - people ), Morgan Stanley ( MS - news - people ), PNC Financial Services ( PNC - news - people ), Regions Financial ( RF - news - people ) and SunTrust Banks ( STI - news - people ) need to raise sums under $2.5 billion.

After the government's announcement, Wells, Bank of America and Morgan Stanley said they would sell new common shares. Bank of America also said it was considering the sale of certain businesses, but added it saw no need for new injections of government money. That has been a sticking point for Kenneth Lewis, Bank of America's chief executive, who was stripped of the title of chairman last week after shareholders lost confidence in his leadership. "We are comfortable with our current capital position in the present economic environment," Lewis said Thursday.

In the most adverse economic scenario tested in the exercise, the government determined the banks stand to lose $600 billion on loans in the next two years, with poor performance for many loan classes. The adverse scenario assumes losses as high as 20%, including as high as 28% from subprime mortgages and 16% from second mortgages. The complete report is available on the Federal Reserve's Web site.