The U.S. Federal Reserve's Stress Test Results: The Beginning Of The End Or The End Of The Beginning For U.S. Banks?

The much-anticipated results of the stress-testing exercise the Federal Reserve Bank (Fed) undertook for the top banks in the U.S. came out on May 7, 2009. These show that 10 of the 19 largest banks need a total of $75 billion in capital to maintain at least 4% of common equity Tier 1 capital if the environment becomes a lot more adverse than experts currently expect. This compares to Standard&Poor's Ratings Services' assessment of an $18 billion need for these 19 banks. Despite the significantly higher capital requirements determined by the Fed's stress tests as compared to our stress tests, we do not see this as an unmanageable amount, and most management teams of the identified banks promptly

...May 12, 2009 The much-anticipated results of the stress-testing exercise the Federal Reserve Bank (Fed) undertook for the top banks in the U.S. came out on May 7, 2009. These show that 10 of the 19 largest banks need a total of $75 billion in capital to maintain at least 4% of common equity Tier 1 capital if the environment becomes a lot more adverse than experts currently expect. This compares to Standard & Poor's Ratings Services' assessment of an $18 billion need for these 19 banks. Despite the significantly higher capital requirements determined by the Fed's stress tests as compared to our stress tests, we do not see this as an unmanageable amount, and most management teams of the identified banks promptly issued statements about how they would raise the capital. If the rigor of the stress-testing process succeeds in allaying market uncertainties about bank solvency, we believe it could set the stage for the rehabilitation of the banking industry, which may include a return to funding...

Commentary