Results show 10 big banks need $75 billion in new capital; hope rises for economy’s recovery
Daniel Wagner and Jeannine Aversa, AP Business Writers
Friday May 8, 2009, 1:09 am EDT
WASHINGTON (AP) — Government exams of the biggest U.S. banks have helped lift a cloud of uncertainty that has hung over the economy.
The so-called stress tests — a key Obama administration effort to boost confidence in the financial system — showed nine of the 19 biggest banks have enough capital to withstand a deeper recession. Ten must raise a total of $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 will take a long time for the banks to resume normal lending. But the test results didn’t alter his prediction that economy is headed for a recovery in October or November.
A key indicator of economic health will be released Friday morning, when the government announces how many more jobs were lost in April and how high the unemployment rate rose.
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 Wednesday, and rallied again in after-hours trading late Thursday once the results had been released.
Among the 10 banks that need to raise more capital, Bank of America Corp. (BAC) needs by far the most — $33.9 billion. Wells Fargo & Co. (WFC) needs $13.7 billion, GMAC LLC $11.5 billion, Citigroup Inc. (C) $5.5 billion and Morgan Stanley (MS) $1.8 billion.
The five other firms found to need more of a capital cushion are all regional banks — Regions Financial Corp. (RF) of Birmingham, Alabama; SunTrust Banks Inc. (STI) of Atlanta; KeyCorp (KEY) of Cleveland; Fifth Third Bancorp (FITB) of Cincinnati; and PNC Financial Services Group Inc. (PNC) 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 stress tests are a big part of the Obama administration’s plan to fortify the financial system. As home prices fell and foreclosures increased, banks took huge hits on mortgages and mortgage-related securities they were holding.
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.