Washington: The United States launched a “stress test” programme to judge banks’ resistance to a possible deeper recession, as investors await President Barack Obama’s budget proposal to see what support it will give the economy.
The stress tests, mandatory for the roughly 20 institutions that each have over $100 billion in assets, will be used to determine whether they need more capital from a new US Treasury programme for government preferred stock investments that can be converted into common equity.
That plan offered some hope that the ailing banking sector could be getting closer to a fix, helping Asian shares edge up on Thursday, but it also underlined the growing cost of shoring up the battered US financial sector and broader economy.
All eyes will be on Obama’s first budget proposal, which he is scheduled to send to the US Congress later on Thursday, bracing for fights over how best to heal the economy, create a new healthcare system and still cut out-of-control deficits.
“It won’t be smooth sailing,” predicted Maya MacGuineas, president of the Committee for a Responsible Federal Budget, which wants tough controls to bring down deficit spending.
Obama has also pledged to cut subsidies to big farm businesses, which will reopen a long simmering fight about whether - and if so, how - the United States should reform its traditional farm supports.
Jitters in Japan
Markets will be looking for reassurances that the government has a clear idea of how to finance its plans to rebuild the US economy, meaning any prolonged battle over the budget could hurt confidence.
US stocks fell on Wednesday, disappointed that Obama’s first major address to Congress a day earlier lacked details of his plan to kickstart growth.
Data showing US sales of existing homes last month dropped to the slowest pace since July 1997 added to the gloom, helping push the Standard & Poor’s 500 stock index down 1%.
The weak housing data fuelled a flight to what are viewed as safe assets, helping the dollar strengthen broadly.
It reached a three-month high against the yen on Thursday, as the Japanese currency appeared to lose favour as a safe-haven bid amid concerns about deterioration in the world’s second-biggest economy.
Yen weakness helped support Japanese shares, especially those of exporters such as Nissan Motor, as did bets that the US “stress tests” could bring greater certainty to the financial sector. The Nikkei rose 1.1% while Korean shares were up about 1%.
The Bank of Japan has cut interest rates to near zero and started buying a range of corporate assets to combat recession.
In a sign of the kind of resistance the central bank could meet if it seeks to expand those efforts, BOJ board member Tadao Noda said on Thursday that too much intervention in terms of asset purchases could distort proper market functioning.
Dearer deposit balance
One big surprise was an unexpected 6% jump in Australian business investment in the fourth quarter, suggesting the economy might have dodged a recession for now, and paring back expectations of an interest rate cut next week.
“We suspect it’ll be the last hurrah for investment and it’s downhill from here,” said Su-Lin Ong, senior economist at RBC Capital Markets.
All signs were that troubles with the banking sector worldwide will persist for some time.
Britain is expected to unveil details of a plan later on Thursday to limit banks’ losses on about ¥500 billion ($728 billion) of risky assets, which is designed help prevent full nationalisation.
Around the same time, Royal Bank of Scotland is set to post a record UK loss of up to 28 billion pounds ($40 billion) and unveil a far-reaching restructuring and plans to limit further losses from risky assets.
Australia and New Zealand Banking Group, the fourth-largest Australian lender, said it will cut its full-year dividend by about a quarter and post flat profit growth due to rising bad debt charges.
The US Federal Deposit Insurance Corp will need to raise the premiums it charges banks for guaranteeing bank deposits, its Chairman Sheila Bair said late on Wednesday.
US Treasury Secretary Timothy Geithner stressed that while the government stands ready to support banks that need more capital, it will not be running the banks or nationalising them.