Government examinations of the biggest US banks have helped lift a cloud of uncertainty that has hung over the economy.
The so-called stress tests — a key effort of the administration of US President Barack Obama to boost confidence in the financial system — showed nine of the 19 biggest banks had enough capital to withstand a deeper recession.
Ten must raise a total of US$75 billion in new capital to withstand possible future losses.
“The publication of the stress tests simply cleared the air of uncertainty,” said Allen Sinai, chief global economist at Decision Economics. “The results were not scary at all.”
He said it would take a long time for the banks to resume normal lending. But the test results didn’t alter his prediction that the economy was headed for a recovery in October or November.
The stress tests have been criticized as a confidence-building exercise whose relatively rosy outcome was inevitable. But the information, which leaked out all week, was enough to cheer investors. They pushed bank stocks higher on Wednesday and rallied again in after-hours trading late on Thursday once the results had been released.
Among the 10 banks that need to raise more capital, Bank of America Corp needs by far the most — US$33.9 billion. Wells Fargo Co needs US$13.7 billion, GMAC LLC US$11.5 billion, Citigroup Inc US$5.5 billion and Morgan Stanley US$1.8 billion.
The five other firms found to need more of a capital cushion are all regional banks — Regions Financial Corp of Birmingham, Alabama; SunTrust Banks Inc of Atlanta; KeyCorp of Cleveland; Fifth Third Bancorp of Cincinnati and PNC Financial Services Group Inc of Pittsburgh.
The banks will have until June 8 to develop a plan and have it approved by their regulators. If they can’t raise the money on their own, the government said it’s prepared to dip further into its bailout fund.
The government hopes the stress tests will restore investors’ confidence that not all banks are weak and that even those that are can be strengthened. They have said none of the banks will be allowed to fail.
Among the banks that the government did not ask to raise more capital were JPMorgan Chase & Co, brokerage house Goldman Sachs Group Inc, insurer MetLife Inc and credit card companies Capital One Financial Corp and American Express Co.
Together, the 19 firms that took the test hold two-thirds of the assets and half the loans in the US banking system.
Wells Fargo and Morgan Stanley said they will try to raise billions in fresh capital. Meanwhile, American Express became the first major financial institution to formally request permission to return federal bailout money provided under the Troubled Asset Relief Program.
Separately, Citigroup said it is planning to convert an extra US$5.5 billion of preferred shares — a kind of debt — into common stock after the stress tests determined it needs an equal amount in fresh capital.
GMAC said it will raise the US$11.5 billion mandated by the Treasury within six months, a task that could involve the federal government taking a big stake in the auto finance company.
GMAC, which reported a first-quarter loss of US$675 million, said earlier this week it has seen rising defaults in its auto finance division. That, combined with soured assets in its Residential Capital LLC mortgage unit, makes it more difficult for the company to raise the additional capital in the public markets.