THE EVENT: The Federal Reserve is directing at least seven of
the nation's 19 top banks to boost their capital levels by $65
billion. The official test results, to be released at 5 p.m. EDT,
will show which banks appear able to weather the economic crisis
without more help.
U.S. Federal Reserve Chairman Ben Bernanke, answering questions
at the Chicago Fed, said that while he hopes stress tests add to
market confidence, they aren't meant to be a test of the banks'
solvency.
THE DETAILS: The institutions must have Grade-A Tier 1 capital
of at least 6% of assets, and will be required to have a
"significant" amount of their total equity in common shares,
according to a statement laying out the test criteria.
At least a half-dozen banks - JPMorgan Chase & Co. (JPM),
Goldman Sachs Group Inc. (GS), MetLife Inc. (MET), American Express
Co. (AXP), Bank of New York Mellon Corp. (BK) and Capital One
Financial Corp. (COF) - have been informed they will not be told to
raise additional capital, according to people familiar with the
matter.
Other banks, including Bank of America, must take steps to
address a $34 billion capital shortfall.
The following are the banks directed to raise capital:
* Bank of America Corp. $34 billion
* Wells Fargo & Co. $13 billion to 15 billion
* GMAC LLC $11.5 billion
* Citigroup Inc. $5 billion
* Morgan Stanley $1.5 billion
* Regions Financial Corp. unknown
* State Street Corp. unknown
* Fifth Third Bancorp unknown
* KeyCorp unknown
* PNC Financial Services unknown
* SunTrust Banks Inc. unknown
These banks were deemed to not be in need of new capital:
* JPMorgan Chase & Co.
* American Express Co.
* Goldman Sachs Group Inc.
* Bank of New York Mellon Corp.
* MetLife Inc.
* Capital One Financial Corp.
MARKET REACTION: Shares of Bank of America Corp. and Fifth Third
Bancorp rallied more than 15% Thursday as investors digested the
leaked results of the stress tests and concluded they would be
better for the banks than expected. The rally extended to the
entire sector, as Citigroup, Capital One Financial and Huntington
Bancshares all rose sharply.
Major stock indexes traded down, with the Dow Jones Industrial
Average 77 points lower, to 8434.
The Financial Select Sector ETF (XLF), which tracks the
financial stocks in the S&P 500, added 4%.
Treasury prices slumped Thursday and yields hit fresh highs for
the year ahead of the government's final Treasury auction of the
week and with stocks stronger on some relief over the bank stress
tests.
Crude futures surged as new optimism following leaked results of
the tests is fueling an "appetite for risk," which has sent cash
flowing into the oil market, said Peter Beutel, president of
Cameron Hanover, a trading advisory firm. Other commodities
responded similarly.
WHAT IT MEANS: The banks that need capital will have 30 days to
develop plans for how they will raise any new required capital, the
Fed and other bank regulators said Wednesday.
Many market participants seem to be seeing signs of potential
recovery in the leaked and unknown results of the stress tests.
WHAT'S NEXT: After the results of the Treasury Department's
stress test of the U.S.'s largest banks are released Thursday
evening, the market will begin to guess what the results mean for
the smaller banks that weren't tested.
But the government said in a statement Wednesday night that it
had no intention of expanding the stress test beyond the 19 largest
banks. It also said that "smaller financial institutions generally
maintain capital levels, especially common equity, well above
regulatory capital standards."
The following are key stories:
-Bernanke: Hopes Stress Tests Add To Mkt Confidence
-Budget Projects $91B In Losses From US Bank Failures In '09-10
-Treasurys Down As Stocks Rise; 10-Year Yield Tops 3.25%
-Stress Tests Separate Strong Banks From Weak
-US Weekly Jobless Claims Drop By 34,000
-Bernanke Says Regulators Must Be More Vigilant