One of the provisions of the government’s plan to rescue the financial system is for the nation’s major banks to undergo a “stress test.” This test is designed to look thoroughly into the operations and balance sheets of financial institutions to determine whether they have the financial strength to continue operating. As these banks are scrutinized, many of them are going to be forced to make structural changes in order to remain solvent.

Recently, a small bank in Lockport, NY called First Niagra Bank was able to acquire almost 60 branches from a large regional Pittsburgh-based bank called PNC. Along with these branches came over $6 billion in customer deposits, nearly doubling the deposit base of First Niagra Bank. It’s not a major transaction in the financial world, but could be the first of many as big banks are forced to clean up their balance sheets.

There are a total of 19 banks that are currently being stress tested. The government is being very quiet about the results of these tests and has asked the banks to do the same. There is a chance that most of the banks will test very well and will not be forced to make any changes. There are likely to be some banks, though, that don’t have sufficient capital to support their current operations. These are the banks that may need to sell off assets, and they will be willing to sell for bargain prices. PNC received only a 1.3% premium on the customer deposits that they recently sold.

So far this year, 21 banks have failed, and many of these banks have been small, regional banks. There are several small banks, however, which are very strong financially and could be in a great position to buy distressed assets from larger banks. Many of these banks are hanging on to capital right now in hopes of upcoming opportunities to expand as a result of the stress testing.

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Tags: Bank, capital, Stress Test

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