Major Banks Need to Raise Capital
Although the official results of the stress test for major national banks won’t be released for a couple more days, some details are starting to leak out that provide insight as to what we can expect. The details are both disheartening and encouraging.
We’ll begin with the bad news. According to a story in the Wall Street Journal, 10 of the 19 major banks being tested will need to raise additional capital. This means that over half of the banks are not sufficiently capitalized according to government standards. Bank capitalization has been a big issue over the past several months, as several banks have failed after lacking the capital they need to survive.
The banks that were named in the article included Bank Of America, Citibank, and Wells Fargo, among the three biggest banks in the country. Banks have a couple of choices when it comes to raising capital. They can either issue more common stock, diluting the value of outstanding shares but adding cash to the balance sheet, or they can borrow. Wealthy investors both in the U.S. and abroad have also arranged to provide capital to banks in exchange for preferred shares that carry attractive interest rates and the ability to convert the preferred shares to common stock in the future. Banks can also sell assets to raise capital.
The good news in the report was that Treasury Secretary Tim Geithner has apparently indicated that none of the 19 banks being tested are in danger of being seized by the FDIC. The government has promised to provide additional aid to banks in serious need in order to keep these large banks from failing.
Some banks are planning to explore whether or not the government will allow them to repay some or all of the TARP money that they have received over the past several months. The government is expected to allow banks to repay the loans on the condition that they’re financially strong enough to function without dipping back into the available TARP funds again. The results of the stress test will shed light on which banks might be in the best position to take advantage of that option.
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Tags: banks, capital, Stress Test, TARP money
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