Bank objections delay stress tests

Bank objections delay stress tests
By Francesco Guerrera in New York and Sarah O’Connor in Washington
Copyright The Financial Times Limited 2009
Published: May 1 2009 20:15 | Last updated: May 2 2009 02:44
http://www.ft.com/cms/s/0/ca1da116-3681-11de-af40-00144feabdc0.html


US regulators will delay the release of stress test results for the country’s 19 biggest banks until next Thursday, after some lenders, including Citigroup and Bank of America, objected to government demands that they needed to raise billions in fresh capital.

Citi, one of the biggest victims of the crisis that has already been bailed out three times by the government, is believed to have been told by regulators that it needs more than $5bn in fresh capital, while BofA might need to convert $45bn in government preferred shares into common equity.

Both companies are still contesting the findings and might still persuade the government they need less, or no capital, according to people close to the situation. Citi’s own projections are believed to show the company will have hundreds of millions of dollars in excess capital.

After a week of tense talks between regulators and the banks, government sources said the Treasury and the Federal Reserve were set to unveil the outcome of the tests after the market closes on May 7 – three days later than anticipated.

The authorities’ decision to let the original timetable slip also reflects the widespread belief that, after months of speculation since the tests were first announced in February, their outcome has the potential to disturb the markets.

Government sources said regulators were likely to release both aggregate and individual data for each of the 19 banks, detailing their losses and capital needs under adverse economic scenarios.

Some of the banks will then supplement those data with regulatory filings and analysts’ calls. Bankers said a number of lenders had pleaded with regulators for more time to lay out plans to plug any capital shortfall identified in the stress tests, by raising equity from either the government or from the stock market.

People familiar with the situation said that, despite their objections, Citi and BofA – and at least four more lenders – were almost certain to need more equity capital.

Citi could boost its equity by expanding a planned conversion of preferred shares into common stock, or taking a further capital injection from the government.

The latter move could increase the government stake in Citi beyond the 36 per cent it has already agreed to buy and could then, in turn, lead to the removal of chief executive Vikram Pandit.

The move would give the authorities a sizeable stake in the Charlotte, North Carolina-based lender and further undermine the position of its chief executive Ken Lewis, who was stripped of his role as chairman after a shareholder vote this week. That vote followed an organised campaign against Mr Lewis and a series of demonstrations across the US at his perceived greed and the bank’s ruthless practices. Analysts have suggested that at least four more banks could need capital injections.

A recent note by Morgan Stanley identified SunTrust, KeyCorp and Regions Financial Corp, as regional banks that might require capital, while other experts have suggested Wells Fargo, the large San Francisco-lender could also need to raise more equity.

The banks and regulators have not commented on the likely outcome of the tests.