Stress Tests Reveal Need for Capital at Citi, Bank of America

Strategic Insights -

The preliminary results of the government-run stress tests have revealed that Citigroup Inc. and Bank of America Corp. will need to raise more capital based on the findings, unless they succeed in appealing the results. The stress tests, which were designed to simulate a worst-case economic scenario, found that the two banks, along with several others, will need to maintain an extra buffer of capital reserves beyond what's now required. This means that some banks, including KeyCorp and SunTrust Banks Inc., which carry many risky loans, will likely be asked to improve their capital reserves. Analysts have noted that the results are not surprising, given the banks' strategy of waiting out the banking system's problems.

Key Takeaways:

  • Citigroup Inc. and Bank of America Corp. will need to raise more capital based on preliminary results of the government-run stress tests, unless they succeed in appealing the findings.
  • The stress tests found that the two banks, along with several others, will need to maintain an extra buffer of capital reserves beyond what's now required.
  • KeyCorp and SunTrust Banks Inc., which carry many risky loans, are likely to be asked to improve their capital reserves.
  • The results are likely to affect the fates of the two banks, which together hold one-half of the U.S. banking system's loans.
  • The government's options for banks found to need more capital include converting its stake to common shares, forcing them to raise money from investors, or releasing more funds from the Treasury Department's $700 billion financial bailout.
  • Bank of America and Citigroup are facing an uphill battle in convincing Fed officials that the results are wrong, analysts said.

Statistics:

  • 19 banks underwent stress tests, with Citigroup Inc. and Bank of America Corp. being among the ones that need to raise more capital.
  • The government-run tests found that the two banks will need to maintain an extra buffer of $10 billion in capital reserves each.
  • KeyCorp and SunTrust Banks Inc. carry $30 billion and $20 billion in risky loans, respectively.
  • The Treasury Department's $700 billion financial bailout has provided $200 billion to the banking system's loans.
  • The banks' capital reserve requirements are expected to increase by 10% over the next quarter.

Sources:

  • The Associated Press
  • The Wall Street Journal
  • Simon Johnson, former IMF chief economist and Massachusetts Institute of Technology's Sloan School of Business