Government's Stress Test Results Reveal Vulnerabilities in Banking Industry

Strategic Insights -

The government's long-awaited "stress test" results have found that 10 of the nation's 19 largest banks need a total of about $75 billion in new capital to withstand losses if the recession worsened. The Financial system, like the overall economy, is healing but not yet healed. The Federal Reserve's findings, released Thursday, show that some of the largest banks are stable, but others need billions more in capital, a signal by regulators that the industry is vulnerable but viable.

Key Takeaways:

  • The 10 banks that need to raise more capital are: Bank of America Corp. ($33.9 billion), Wells Fargo & Co. ($13.7 billion), GMAC LLC ($11.5 billion), Citigroup Inc. ($5.5 billion), Morgan Stanley ($1.8 billion), Regions Financial Corp. ($2.5 billion), SunTrust Banks Inc. ($2.2 billion), KeyCorp ($1.8 billion), Fifth Third Bancorp ($1.1 billion), and PNC Financial Services Group Inc. ($600 million).
  • The banks that need more capital already are announcing their strategies, such as Morgan Stanley, which plans to raise $5 billion, including $2 billion in common stock.
  • The tests found that if the recession were to worsen, losses at the 19 stress-tested firms during 2009 and 2010 could total $600 billion.
  • Financial stocks surged in after-hours trading, with Citigroup shares jumping 8.4 percent to $4.13 and State Street rising 7.3 percent to $40.60.
  • Critics have raised concerns that regulators are playing to public expectations and that the findings may not be credible.

Statistics:

  • $75 billion: The total amount of new capital needed by 10 of the nation's 19 largest banks.
  • $1.8 trillion: The total losses at the 19 stress-tested firms during 2009 and 2010, if the recession were to worsen.
  • $33.9 billion: The amount of capital needed by Bank of America Corp.
  • 8.8%: The unemployment rate assumed in the first stress test scenario.
  • 10.3%: The unemployment rate assumed in the second, worse-than-expected stress test scenario.
  • 14%: The house price decline assumed in the first stress test scenario.
  • 22%: The house price decline assumed in the second stress test scenario.

Sources:

  • THE ASSOCIATED PRESS WASHINGTON -- (no date provided)
  • Kevin Logan, chief U.S. economist at Dresdner Kleinwort
  • Jaidev Iyer, a former risk management chief at Citigroup