Ten major US banks need to raise a total of $US74.6 billion ($A98.84 billion) for “capital buffers” in the event of a deeper economic slump under “stress tests” unveiled on Thursday by US regulators.
Federal Reserve chairman Ben Bernanke said the results “should provide considerable comfort to investors and the public” despite the need for new capital in 10 of the 19 banks subjected to the process.
The central bank, which conducted the tests at the request of the Obama administration, said they showed the banks can withstand an adverse economic scenario but will be required to raise fresh capital to boost their reserves against losses.
Treasury Secretary Timothy Geithner said in a statement the tests “will help replace the cloud of uncertainty hanging over our banking system with an unprecedented level of transparency and clarity”.
Among the 19 banks tested, Bank of America had the largest need at $US33.9 billion ($A44.92 billion), followed by Wells Fargo with $US13.7 billion ($A18.15 billion).
Bernanke said nearly all the banks have sufficient capital “to absorb the higher losses envisioned under the hypothetical adverse scenario”.
But he noted the 10 firms judged to have shortfalls “need to enhance their capital structure to put greater emphasis on common equity, which provides institutions the best protection during periods of stress”.
GMAC, the former finance arm of General Motors, was seen as needing $US11.5 billion ($A15.24 billion) while Citigroup needed $US5.5 billion ($A7.29 billion). The others included Regions Financial ($US2.5 billion or $A3.31 billion), SunTrust ($US2.2 billion or $A2.91 billion), KeyCorp ($US1.8 billion or $A2.38 billion), Morgan Stanley ($US1.8 billion or $A2.38 billion), Fifth Third ($US1.1 billion or $A1.46 billion) and PNC ($US600 million or $A794.97 million).
Those not in need of new capital were American Express, BB&T, Bank of New York Mellon, Capital One, Goldman Sachs, JPMorgan Chase, MetLife, State Street and US Bancorp.
Some banks immediately announced plans to raise new capital through share offerings or by exchanging some preferred shares for common stock, which is seen as a better buffer.
Wells Fargo said it would launch an offering of $US1 billion ($A1.32 billion) of common stock.
Morgan Stanley said it had “commenced a public stock offering of $US2 billion ($A2.65 billion)” and would seek to repay the US Treasury’s investment “as soon as possible”.
Morgan Stanley also said it would offer $US3 billion ($A3.97 billion) in bonds not guaranteed by deposit insurance.
Bank of America said it would meet regulator demands through sales of assets and other actions that allows it to repay the US Treasury.
Bank of America said it “intends to sell common stock and/or convert existing privately held preferred stock into common shares” to meet the requirement for core capital.
It has already announced it will sell First Republic Bank “and is considering the sale of several other business units including Columbia Management,” the statement said. “It may also consider several joint ventures.”
“Our intention will be to reach the government’s target on our own without exchanging any of the current US investment in Bank of America into mandatory convertible preferred stock,” said Joe Price, chief financial officer.
“That would allow us to minimise the use of government money and put us into a position to repay the government’s investment sooner.”
Citigroup unveiled a plan to shore up its capital base by exchanging preferred for common shares, saying the moves would limit the US government stake in Citi to 34 per cent.
The troubled bank, which had to turn to the Treasury to avert a meltdown in 2008 and again in 2009, said its moves would boost its capital position by increasing its exchange of preferred shares for common stock.
Citi said it would convert $US33 billion ($A43.72 billion) of preferred shares, or $US5.5 billion ($A7.29 billion) more than under a plan announced in February.
The stress tests were conducted by the Federal Reserve with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to “determine the capital buffers sufficient for the 19 (banking firms) to withstand losses and sustain lending – even if the economic downturn is more severe than is currently anticipated,” the Fed said.
Bernanke pointed out that the Treasury “stands ready to provide whatever additional capital may be necessary to ensure that our banking system is able to navigate a challenging economic downturn”.