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: In the stress test results release, the Fed's
analysts will report their estimates of losses and loss rates
across select categories of loans, resources available to absorb
those losses, and the resulting necessary additions to capital
buffers. The estimates reported by the Federal Reserve represent
values for a hypothetical 'what-if' scenario and are not forecasts
of expected losses or revenues for the firms, according to the
Fed.
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. In addition to the Tier 1 risk-based
capital commonly used, the stress tests also focus on a minimum
"Tier 1 common capital" level of 4%. The additional measure
"reflects the fact that common equity is the first element of the
capital structure to absorb loss," according to a joint statement
released by bank regulators.
The following institutions were directed to raise capital:
* Bank of America Corp. (BAC) $34 billion
* Wells Fargo & Co. (WFC) $13 billion to 15 billion
* GMAC LLC $11.5 billion
* Citigroup Inc. (C) $5 billion
* Morgan Stanley (MS) $1.5 billion
* Regions Financial Corp. (RF) Amount unknown
* State Street Corp. (STT) Amount unknown
These institutions were deemed not to need new capital:
* JPMorgan Chase & Co. (JPM)
* American Express Co. (AXP)
* Goldman Sachs Group Inc. (GS)
* Bank of New York Mellon Corp. (BK)
* MetLife Inc. (MET)
* Capital One Financial Corp. (COF)
Results for these institutions weren't known:
* Fifth Third Bancorp (FITB)
* KeyCorp (KEY)
* PNC Financial Services (PNC)
* SunTrust Banks Inc.(STI)
MARKET REACTION: Financial stocks turned lower as investors
awaited the release of the stress-test results. Though pitfalls
remain for the financial system and the economy, investors have
shown increasing willingness lately to bet that the worst of the
crisis is over, at least.
Shares of Bank of America Corp. and Fifth Third Bancorp were
still up after rallying 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 early rally
extended to the entire sector, but some of the banks lost steam.
Citigroup recently was down 6%, Capital One was up 15%, and
Huntington Bancshares rose 1.7%.
Major stock indexes traded down, with the Dow Jones Industrial
Average 121 points lower, to 8389.
The Financial Select Sector ETF (XLF), which tracks the
financial stocks in the S&P 500, turned negative as well,
falling 2%.
Treasury prices also continued to slump Thursday, with the
entire curve under pressure, and yields hit fresh highs for the
year after the government's final Treasury auction of the week.
Crude futures surged to nearly a six-month high, meanwhile,
driven by the prospect of higher oil demand as major economies
recover. Other commodities gained similarly.
WHAT IT MEANS: The banks that need capital will have until June
8 to develop a detailed plan for how they will raise any new
required capital, the Fed and other bank regulators said Wednesday,
and until Nov. 9 to implement that plan.
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, 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:
-STRESS TESTS: GMAC Faces Capital Drain
-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
-STRESS TESTS: Government Using Little-Known Capital Measure