US banks on 'stress tests' to help economy

Friday, May 8, 2009 at 2:13 AM Posted by Beijing News


US authorities prepared to release results Thursday of "stress tests" on leading banks, in the hope that the process will boost confidence in a financial system reeling from the prolonged recession.

Financial markets have been nervous ahead of the results, amid fears that key lenders will face capital shortfalls that require them to constrict lending further and crimp activity in a weakened economy.

"The worst case scenario could include several bank failures which may sink growing optimism" about an economic recovery, said John Rivera at Forex Capital Markets.

Still he said markets appear to have shaken off most of their worst fears, including one report that Bank of America may need 34 billion dollars to shore up its capital base.

"There is a growing confidence that the troubled bank will be able to raise the funds by converting the preferred shares that they sold the government into common or exploring selling assets like their stake in Blackrock," Rivera said.

"Other beleaguered banks will have similar options which could make the results a non-event."

But Ed Yardeni at Yardeni Research said the release could be a watershed event, and that the stock market rally that has extended for nearly two months suggests optimism.

"What if the public release of the stress test results for the 19 big banks tomorrow marks the end of the crisis, at least as far as the stock market is concerned?" he said

"The S&P 500 bank stock price index certainly suggests this may be the case."

Earlier this week, Federal Reserve chairman Ben Bernanke said financial markets and financial institutions remain "under considerable stress," but said he believed the economy will be able to pull out of its slump later this year.

"We continue to expect economic activity to bottom out, then to turn up later this year," he told a key congressional panel.

He said key elements of his forecast were assessments that the housing market -- at the epicenter of global financial turmoil -- and household demand were beginning to stabilize.

A statement by the US Treasury and banking regulators said the tests have been carried out because it is "important for the largest US bank holding companies to have a capital buffer sufficient to withstand losses and sustain lending even in a significantly more adverse economic environment than is currently anticipated."

The results will be released publicly by the Federal Reserve at 2100 GMT Thursday, in which each of the 19 institutions will be rated for their ability to weather various economic scenarios.

The buffer "builds in extra capital against the unlikely prospect that the adverse scenario materializes," said the statement from Treasury along with the Federal Reserve, Federal Deposit Insurance Corp. and Comptroller of the Currency.

"The presence of this one-time buffer will give market participants, as well as the firms themselves, confidence in the capacity of the major banks to perform their critical role in lending, even if the economy proves weaker than expected."

Any banks notified of capital shortfalls will have until June 8 to develop a detailed capital plan, and until November 9 to implement the plan.

An exchange of the Treasury's preferred shares from capital injections would boost the government's ownership stake in the banks, although officials say they hope to reduce these holdings when the system stabilizes.



Marai

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