Prolonging Angst as Stress Tests Delay

The long awaited stress test results on the nineteen biggest U.S. banks, slated to for release May 4, will likely remain a mystery until next Thursday at the earliest, according to media reports. Preliminary results were delivered to banks last week, but the Federal Reserve is reportedly postponing the results as executives debate preliminary findings and any recovery plans with examiners. The disclosure may potentially send the stock prices of weaker institutions falling. “Everybody understands they’ve got a tiger by the tail here,” said Mark Tenhundfeld, a senior vice president at the American Bankers’ Association, according to a Bloomberg report. “If they don’t let him go gently, there will be a lot of mauling going on.” The tests began in late February. Regulators required all US bank holding companies with year-end 08 assets exceeding $100bn to participate in the assessment. These 19 institutions collectively hold two-thirds of the assets and more than half the loans in the US banking system, according to the Fed. More than 150 examiners, supervisors and economists from the Fed, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation studied banks’ potential performance under projected economic expectations and a more adverse outlook with a longer, more severe recession. The point: to determine the capital buffer needed to ensure the firms would remain appropriately capitalized at the end of 2010 if the economy proves weaker than expected. On April 24, the Federal Reserve detailed the process and methodologies used in the stress tests. In the same report, the Fed said most US banking organizations currently have capital levels in excess of the amounts required to be classified as well capitalized. The Fed warned, however, “losses associated with the deepening recession and financial market turmoil have substantially reduced the capital of some banks.” At least six of the nineteen banks will require additional capital, according to reports quoting people close to the matter. And most of the capital is likely to come from the conversion of preferred shares to common equity. The Wall Street Journal reported earlier in the week, citing people familiar with the situation, that the government told Citigroup (C) and Bank of America (BAC) it’s possible both will need to raise more capital. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

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