Banks Need To Raise More Capital
The results of the long awaited bank stress testing are finally in, and they are a mix of positive and negative news. Over the past week or so, some news about the results has already leaked out, but now we can finally look at the official results in their entirety.
Out of the 19 banks tested, 10 will need to raise additional capital, with the other 9 sufficiently capitalized in their current position. The total amount of capital needed in the system is just under $75 billion, with Bank of America in need of the most capital, nearly $34 billion. It was Bank Of America that bought both Countrywide Financial and Merrill Lynch in 2008, two giant companies with major exposure to toxic assets and bad loans on their balance sheets. Wells Fargo, Citibank, and GMAC are all in need of substantial capital infusions as well.
Asking the banks to raise capital is designed to help them be in a better position to deal with the losses that could come if the market worsens. The testers put banks through scenarios for both expected market conditions and scenarios where the economy worsens substantially. In the tests for a worsening economy, banks would need to able to absorb about $600 billion on top of losses already on the books, most of which would be expected to come from mortgage and credit card defaults.
The best positioned banks according to the stress tests were Goldman Sachs, JP Morgan Chase, Bank of New York Mellon, and American Express.
Treasury Secretary Timothy Geithner called the results of the stress tests “reassuring” and said that he was optimistic that banks would now be able to focus on banking business again. The 10 banks that need to raise capital were given a month to develop a plan for raising the necessary funds and 6 months to put that plan in place. The banks have also all been asked to look closely at management teams, making sure that they have the right people in place to navigate them through these turbulent times in the world of banking.
The best thing that will probably come of this is not necessarily for banks though. The reassurance and confidence that the general public should gain in the financial system in knowing that the biggest financial building blocks in our economy have been thoroughly tested will go a long way in leading to recovery and a healthier economy again. We’re not out of the woods yet, but these results could have been much worse. Citigroup CEO Vikram Pandit summed up everyone’s feeling about the stress testing when he said Thursday, “I’m glad it’s over!”
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Tags: banking, banks, capital, credit card, Stress Test
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