Vol. 73/No. 20      May 25, 2009

The test was conducted for 19 of the biggest banks with at least $100 billion in assets, considered by the government as “too big to fail.” It projects a “worst case scenario” of the banks losing $599 billion through the end of 2010, or 9.1 percent of their total loans, which would be the highest rate of loss since 1921. The report assumes a 10.3 percent official unemployment rate next year, the economy contracting 3.3 percent, and a 22 percent decline in housing prices.

Economic conditions, however, may get considerably worse. Unemployment is already at almost 9 percent and the economy has contracted over the past six months by more than 6 percent.

The report mandates Bank of America to raise $33.9 billion; Wells Fargo, $13.7 billion; and the auto finance unit GMAC, $11.5 billion. Plans for raising these funds must be submitted to federal officials by June 8 and carried out by November 9. The government hopes this will be done through “private infusions” of capital, instead of additional federal bailout funds.

According to the Wall Street Journal, the Federal Reserve’s projections of the big banks’ capital deficits was much larger than $75 billion but was “significantly scaled back” in the report. Citigroup, for example, which has already been given $50 billion in government bailout funds, was previously listed as having to raise $35 billion but the final report lowered that amount to $5.5 billion.

Though not in the report, the government told the banks they may not have to raise the full $75 billion “if earnings over the next six months outstrip regulators’ forecasts,” reported the Financial Times. This will “increase the incentive for banks to book profits in the next two quarters,” the paper added.

Banks have also been adopting new accounting methods to show higher profits. In April banks were told to use their own judgment of the value of “assets,” instead of depressed market prices. Goldman Sachs, which reported $1.8 billion in profits the first quarter of this year, switched from issuing reports from the fiscal year ending November 30 to the calendar year, eliminating December, where the bank lost $780 million.

Billions of dollars in government bailouts already given to the banks have done little to get them to lend. According to CNN Money, the median change in lending of 21 of these banks declined 2 percent in February compared to the previous month. The new government plan won’t make much of a difference, noted the Journal as it “might prompt banks to hoard cash and further curtail lending.”

Among the banks that don’t have to raise additional capital, according to the report, are JP Morgan Chase, Goldman Sachs, American Express, and Bank of New York Mellon. Many of these “healthier” banks plan to “reshape the competitive landscape,” noted the Times, by repaying the government bailout funds they had received under the Troubled Asset Relief Program.

The “stress test” report doesn’t address the conditions of the 8,000 midsize and smaller banks in the United States, many of which are in poorer shape and have fewer options for raising funds to cover their debts.  
 
 
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