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 Maybe the Federal Reserve's stress tests weren't just softball questions after all? Bank of America Corp. (NYSE:BAC) and Citigroup Inc. (NYSE:C) reportedly are in last-ditch efforts to convince regulators that the results are incorrect, and that their balance sheets aren't as bad as the stress tests suggest. If the stress tests are accurate though, each of the two troubled financial giants is staring down the barrel of having to raise $10 billion or more in new capital to shore up their positions, a task which would be very difficult if it's revealed they did poorly on the stress tests. According to the Financial Times: "preliminary findings have revealed that Citi, which has already been bailed out three times by the authorities, could need an extra $10 billion or more if the economy worsens. BofA, which has had $45 billion in government aid, was found to need well in excess of $10 billion, people familiar with the matter said." And its not only the usual suspects of BofA and Citi that need to bolster their capital position. The Deal's Bill McConnell writes: "Citigroup Inc. and Bank of America Merrill Lynch. are widely believed to have been shown by the tests to need more capital and at least four other institutions are believed to be on the list, too. Various sources have speculated on which other institutions are on that list, and predictions from analysts who have conducted their own versions of stress test include Fifth Third Bancorp, KeyCorp, PNC Financial Services Group Inc., Regions Financial Corp., SunTrust Banks Inc. and Wells Fargo & Co." (See full story in TheDeal Pipeline.) While the Fed and the Treasury assured that no bank will "fail" the stress tests, the prospect that an institution might not make it without new capital is handicapping the ability of the institutions to attract outside capital as investors fear a massive stock dilution in the future if the government has to step in again. - George White See story from the Financial Times See Deal Pipeline story (subscription required)
CategoriesComments
From: Bill McConnell,
Yes Hal, the FDIC conducts stress tests regularly but they do not include as many economic parameters as these Feds tests did nor do they project for economic downturns.
Posted on:
May 19, 2009 4:29 PM
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Hmm. This may be one of the reasons that gold is jumping right now and the dollar is falling. A lot of fear going into the announcements of the tests.
I've been wondering though. Wasn't the FDIC supposed to be conducting stress tests on banks on a regular basis anyway?