Stress Tests Reveal Winners and Losers in US Banking Scene

The Obama administration's stress tests of 19 of the largest US banks have produced a surprise winner: Timothy Geithner, the Treasury secretary, and the regulators who worked under him. The tests, announced on May 7th, revealed that nine of the banks, including JPMorgan Chase and Goldman Sachs, had passed with flying colors, while ten others, including Bank of America and Wells Fargo, needed to improve. The tests were designed to provide a clear picture of the financial health of the US banking system and to prevent a repeat of the financial crisis that gripped the country in the fall of 2008.

Key Takeaways:

• The stress tests revealed that nine US banks, including JPMorgan Chase, Goldman Sachs, and US Bancorp, had sufficient capital to meet regulatory requirements and did not need to raise additional funds.
• Ten banks, including Bank of America, Wells Fargo, and GMAC, were required to raise a total of $63.7 billion in new capital to meet regulatory requirements.
• Bank of America was required to raise $33.9 billion in new capital, representing a capital buffer of 9.9% of its risk-weighted assets.
• Wells Fargo emerged as a surprisingly poor student, with regulators calculating that it should raise $13.7 billion in fresh capital to absorb up to $86.1 billion in possible losses.
• The stress tests set a threshold for Tier 1 capital of 6% of risk-weighted assets, with Tier 1 common equity of at least 4%, and targeted common equity as the bedrock that absorbs losses first.
• Regulators announced on May 6th the terms under which all bank recipients of TARP funding could pay it back, with banks required to meet new minimum capital levels and show an ability to issue debt for terms of greater than five years without an official guarantee.

Statistics:

• $63.7 billion: the total amount of new capital required by ten US banks to meet regulatory requirements.
• $33.9 billion: the amount of new capital required by Bank of America to meet regulatory requirements.
• 9.9%: the capital buffer required by regulators for Bank of America.
• $136.6 billion: the potential losses that Bank of America could absorb in the supervisors' "more adverse economic scenario".
• 4%: the minimum required threshold for Tier 1 common equity as the bedrock that absorbs losses first.
• $13.7 billion: the amount of new capital required by Wells Fargo to meet regulatory requirements.
• $86.1 billion: the potential losses that Wells Fargo could absorb in the supervisors' "more adverse economic scenario".

Sources:

• The Economist Intelligence Unit
• The New York Times
• The Wall Street Journal
• Bloomberg
• Financial Times