Billions required to bolster US banks - Shares jump as gaps appear manageable/Bernanke: Stress tests could pave way for further intervention

Billions required to bolster US banks - Shares jump as gaps appear manageable
By Francesco Guerrera and Greg Farrell in New York
Copyright The Financial Times Limited 2009
Published: May 6 2009 19:28 | Last updated: May 7 2009 01:02
http://www.ft.com/cms/s/0/b7c50d96-3a6a-11de-8a2d-00144feabdc0.html


US financial stocks soared on Wednesday as investors expressed relief the capital shortfalls identified by the government’s “stress tests” at large banks such as Citigroup and Bank of America were not as big as some had feared.

The bank rally occurred as news of the capital needs of the 19 banks involved in the tests leaked out during the day, ahead of the official release of the results on Thursday.

Citi, BofA and Morgan Stanley were among the big names that will have to raise equity following the completion of the tests, while JPMorgan Chase, Goldman Sachs and American Express are among those that will not need additional capital, people familiar with the situation said.

Citi and BofA emerged as the banks with the biggest capital shortfalls, with Citi’s equity needs projected to be more than $50bn and BofA requiring about $34bn in fresh equity.

More on stress tests
Facts and figures aim to break vicious cycle

How the assessments were carried out

However, BofA’s capital deficit is more pressing because Citi has already agreed to bolster its balance sheet by converting preferred shares owned by the government and other investors and selling non-core businesses.

People close to the situation expect Citi to have to raise no more than $6bn through the expansion of its planned conversion of preferred shares – less than the $10bn-plus the market had feared. The move could decrease the government’s stake in Citi, which was expected to be 36 per cent to about 33 per cent.

Morgan Stanley is believed to need $1.5bn in additional equity, as a result of its recent acquisition of a majority stake in Citi’s Smith Barney brokerage unit.

Tim Geithner, the US Treasury Secretary, said last night on PBS: “I think the results will be, on balance, reassuring.” Investors shared that feeling, with shares in BofA, Citi and Wells Fargo – another bank expected to need $10bn-plus in equity – all rising more than 15 per cent.

Up to 10 of the 19 banks are likely to need fresh equity, according to people familiar with the situation.

The authorities on Wednesday revealed that the tests aim to ensure that even in an adverse economic scenario banks would still have tier one capital of at least 6 per cent of risk-weighted assets and tangible common equity of at least 4 per cent at the end of 2010.

Each bank told to raise additional equity will have until June 8 to present a plan to regulators explaining how it intends to do so.

These banks will also be required to remedy any “weaknesses” in their internal capital planning and to outline how they eventually intend to wean themselves off government aid.

The revelation that BofA needs about $34bn in extra capital will increase pressure on Ken Lewis, its embattled chief executive.

The banks and the regulators declined to comment or were unavailable.

New equity ratio rule

US banks will be required to hold enough equity to ensure that they would still have a common equity ratio of at least 4 per cent of risk-weighted assets at the end of 2010 even if the adverse scenario set out in bank stress tests were to materialise, the authorities said on Wednesday, writes Krishna Guha.

The use of a common equity ratio – even if as a benchmark rather than a formal future standard – is a departure from normal bank regulation. It is intended to ensure that banks have good quality capital, providing permanent capacity to absorb losses and flexibility over cash distributions.

The authorities also said that banks will also be required to hold enough overall tier one capital to ensure that they would still have tier one capital equal to at least 6 per cent.

Banks will have 30 days to present a plan to meet the demands identified by regulators. They will also be required to outline steps they will take to “address weakness, where appropriate” in their own processes for capital planning.

Moreover, they will be asked to outline how they will, over time, repay existing government capital injections (in the form of preferred shares) and reduce reliance on debt issued under a government-guaranteed programme.







Bernanke: Stress tests could pave way for further intervention
By Tom Braithwaite in Washington
Copyright The Financial Times Limited 2009
Published: May 7 2009 17:01 | Last updated: May 7 2009 17:01
http://www.ft.com/cms/s/0/e233f764-3b18-11de-ba91-00144feabdc0.html


The stress tests on the 19 biggest US banks pave the way for an ongoing interventionist approach to regulation, Ben Bernanke, chairman of the Federal Reserve, signalled on Thursday.

Hours before the publication of the results of the tests, which are expected to show that banks including Citigroup and Bank of America are short of capital, Mr Bernanke told the Chicago Fed that the “exercise has been comprehensive, rigorous, forward-looking, and highly collaborative… Undoubtedly, we can use many aspects of the exercise to improve our supervisory processes in the future.”

With the US government in the throes of a broad regulatory overhaul, Mr Bernanke said that liquidity and risk management would be subject to “equal emphasis” with capital standards, which fell short in measuring the health of the sector.

“Although capital remains a critical bulwark of a strong banking system, the crisis has also demonstrated the importance of effective liquidity management,” he said.

“Along with our colleagues at the other US banking agencies, we are monitoring the major firms’ liquidity positions on a daily basis and are discussing liquidity strategies, key market developments and liquidity risks with the firms’ senior managements.”

The stress tests are expected to show all the banks passing a benchmark Tier 1 capital ratio, but regulators believe that is no longer an appropriate measure of strength. Both the Treasury and the Fed are focusing more on tangible common equity.

Leaked information from the tests has buoyed the stock market in recent days as investors have grown increasingly confident that a capital shortfall at the most troubled institutions was not as big as feared.

Tim Geithner, Treasury secretary, said yesterday in an interview with PBS television’s Charlie Rose program that there were “very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward.

Mr Bernanke also signalled that pay should be reformed at banks, with bonuses set up to focus on long-term success rather than short-term profits. “Bonuses and other compensation should provide incentives for employees at all levels to behave in ways that promote the long-run health of the institution,” he said.