Washington: Major US banks need to raise fresh capital to comply with government “stress tests” but will emerge stronger to help the economy rebound, top officials said on Thursday.
White House spokesman Robert Gibbs added that the tests would likely produce “some confidence in our financial system and some genuine clarity about the path moving forward” to ease the financial crisis.
Gibbs called the effort “an important step on the road to financial stability.”
Treasury secretary Timothy Geithner, in a statement released by his office that also appeared in the New York Times, offered no figures but indicated that “some banks need to raise additional capital to provide a stronger foundation of resources over and above their current capital ratios.”
Up to 10 of the 19 banks being stress-tested will likely need fresh capital, some reports said.
Geithner noted that they would have “a range of options” to raise capital over six months and that any bank unable to accomplish this through share or asset sales or conversions could request funds from the Treasury’s “Capital Assistance Program.”
“Treasury is providing this backstop so that markets can have confidence that we will maintain sufficient capital in the financial system,” he wrote.
“As part of this process, banks will continue to restructure, selling non-core businesses to raise capital ... Over time, our financial system should emerge stronger and less prone to excess.”
The Wall Street Journal reported that at least seven of the biggest US banks will need to boost their capital by a total of $65 billion to be financially stable, including 34 billion for Bank of America.
Edward Yingling, president of the American Bankers Association, said that the results “should put to rest the harmful speculation we have seen over the past few months.”
Financial markets have been nervous ahead of the results, amid fears that key lenders will face capital shortfalls that require them to constrict lending further and crimp activity in a weakened economy.
But Andrew Busch at BMO Capital Markets said authorities have offered a clear indication that no major US bank would be allowed to fail.
“No matter how bad the test results for any of the 19 (banks) will be, the Federal Reserve and Treasury will provide a capital backstop for it,” Busch said.
“The results are a fait accompli showing what the government may inject to keep them afloat.”
Kevin Giddis at Morgan Keegan said that “the clear hope is that the economy begins to round the corner before then, making any capital-raising measures no longer necessary at that time.”
Any banks notified of capital shortfalls will have until 8 June to develop a detailed capital plan, and until 9 November to implement the plan.
Peter Morici, economist at the University of Maryland, said investors should steer clear of any bank deemed to be short of capital because any new investment or injection would dilute the value of the existing shares.
“Investors would be foolish to purchase any common stock or bonds in a bank requiring additional capital if any uncertainty emerges about the bank’s ability to raise all the new capital from private sources,” Morici said.
“No one should want to own shares in a bank with even the prospect of partial government ownership.”
The results were to be released publicly by the Federal Reserve at 2100 GMT (02:30am) on Thursday, in which each of the 19 institutions will be rated for their ability to weather various economic scenarios.