US asks 10 banks to raise $75 bn additional capital

Press Trust of India / Washington May 08, 2009, 14:55 IST

The US Federal government has directed the country's 10 leading banks to boost their capital by $75 billion, following the rigorous stress tests.

The much-awaited results of the stress tests on the nation's 19 largest Bank Holding Companies (BHCs) showed that 10 of them need more capital to the tune of $75 billion while the remaining including Goldman Sachs and American Express are well-capitalised.

The stress tests were aimed at determining capital buffers sufficient for the 19 entities to withstand losses and sustain lending -- even if the economic downturn is more severe than is currently anticipated.

Among the entities being asked to boost their capital, Bank of America needs the most of $33.9 billion while Wells Fargo has to raise $13.7 billion, the US Federal Reserve said in a statement late Thursday.

The auto financing arm of General Motors -- GMAC LLC, and Citigroup have to increase their respective capital by $11.5 billion and $5.5 billion, respectively.

According to the Federal Reserve, the losses at the 19 firms could be a whopping $600 billion, if the economy were to become more worse during 2009 and 2010.

Other entities which have been ordered to come up with additional capital are Regional Financial Corp ($2.5 billion), SunTrust Banks ($2.2 billion), Morgan Stanley ($1.8 billion), KeyCorp ($1.8 billion), Fifth Third Bancorp ($1.1 billion) and PNC Financial Services Group ($0.6 billion).

Following the Supervisory Capital Assessment Program (SCAP), better known as stress tests, the 10 companies are required to bolster their capital buffer by November 9, 2009.

Apart from Goldman Sachs and American Express, the stress tests have found that seven more entities does not have to boost their capital. They are US Bancorp, State Street Corp, MetLife, JPMorgan Chase, Capital One Financial Corp, Bank of New York Mellon and BB&T Corporation.

The 19 BHCs together hold two-thirds of assets and more than one-half of the loans in the US banking system.

Commenting about the stress tests, Federal Reserve Chairman Ben S Bernanke said that these examinations were not tests of solvency.

"... We knew already that all these institutions meet regulatory capital standards... The examiners found that nearly all the banks that were evaluated have enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical adverse scenario," Bernanke noted.

A detailed plan about raising more capital should be submitted to the Federal authorities by June 8.

"... If the economy were to track the more adverse scenario, losses at the 19 firms during 2009 and 2010 could be USD 600 billion.

"The bulk of the estimated losses --approximately $455 billion -- come from losses on the BHCs' accrual loan portfolios, particularly from residential mortgages and other consumer-related loans," the statement said.

Going by the Federal Reserve, the estimated additional capital buffer would be about $185 billion at the end of 2008. Since then, the concerned companies have begun assets sales and initiated restructuring measures, among others.

In addition, the "pre provision" net revenues of many of these firms have exceeded nearly $20 billion, considering the adverse economic scenario.

"The effects of these transactions and revenues rendered the additional capital needed to establish the SCAP buffer equal to $75 billion," the statement noted.

The stress tests were conducted by the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.