Stressing Over Stress Tests

$34 Billion Equals a Lot of Stress; Still, Banks May Fare Better Than Expected in 'Stress Tests'

The results of the United States Treasury Department's bank "stress tests" — intended to determine if the institutions are healthy enough to repay their government bailout loans and still provide adequate lending to drive the economic recovery — are leaking in bits and pieces ahead of their official disclosure later today or tomorrow. And the numbers appear to be "not as bad as they could have been," said Wharton finance professor Jeremy J. Siegel.

Yesterday, "people familiar with the situation" told various news organizations that Bank of America learned from its stress test that it needs to raise $33.9 billion in additional capital, while Citibank may have to raise as much as $10 billion. In all, 10 of the 19 major financial institutions that underwent the tests were told they will need more capital, according to a report in The Wall Street Journal.  Among those said to have passed the test are Bank of New York Mellon, Goldman Sachs and JP Morgan Chase.

One reason that banks have been eager to repay the loans that they received under the government's Troubled Asset Relief Program is to free themselves from restrictions that came with the funds, including limits on executive compensation, dividend payments and stock repurchases.

Noting that the numbers reported so far have not been official, Siegel said today that the overall results appear to show the banks are generally in better shape than was assumed before the tests were announced during the first weeks of the Obama administration. "None of the additional capital requirements have been so high that a bank would have to, say, liquidate… [or] give the government a bigger stake than it already has." He predicted that institutions will have "a good shot" at getting the additional capital they need in the public markets. "The degree to which they can do so will say a lot about the state of the recovery."

Siegel is eager to see the terms under which the institutions passed the tests. "We haven't been as privy to the process as we would have liked." According to most news accounts of the process, the requirements were subject to negotiations between bank executives and government regulators. "It will be interesting to see what, in the end, the standards were," Siegel noted.

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