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The Age (Australia)

It's Show and Tell Day for US Banks

Edmund Andrews

US FEDERAL bank regulators plan to release the much-anticipated results of their "stress tests" on the nation's 19 biggest banks next Thursday, several days later than they had originally expected, in part because some of the banks continue to disagree with the Government's initial conclusions.

Senior officials at the Federal Reserve's regional banks, especially the New York Fed, are expected to be in discussions with bank executives throughout this weekend and into next week, according to Government officials and bank executives.

The goal of the tests is to determine how much additional capital each big bank will need if the economic downturn proves to be worse than expected.

Many analysts expect that several major institutions, including Bank of America and Citigroup, will be ordered to come up with billions of dollars in additional capital.

Banks that do get such marching orders will be required to submit a capital-raising plan within one month and will have six months to actually raise the money.

In practice, the banks will be under pressure to line up the new capital immediately, and several are expected to announce specific plans on the day the results are released.

The Treasury is expected to supply the weaker banks with much, if not all, of the capital they need in exchange for voting shares of common stock, a move that could make the Government a major shareholder in some institutions.

The Treasury could provide the capital through cash infusions from what is left in its $700 billion financial rescue program, the Troubled Asset Relief Program. But Treasury and Fed officials are also expected to simply swap out the Government's existing preferred shares, which offer dividends but have no voting power, into shares of common stock.

Treasury and Fed officials said they would publicly release both aggregate results for the entire group of banks and specific results for individual institutions.

The public disclosures will include information on the estimated losses that each bank would suffer if the recession proves worse than expected and how much capital the bank will have left to absorb those losses.



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The regulators will also disclose how big a capital buffer they expect all the banks to have for at least the foreseeable future.

The public disclosures are expected to be much more detailed and revealing than bank regulators normally provide.

Indeed, Treasury officials were reluctant to release any of the results themselves, fearing the information could set off panicky reactions among investors and add to the banks' existing woes.

But a growing number of lawmakers and financial analysts have demanded that officials make the results public, given that taxpayer money will probably be used to fill whatever shortfalls the tests reveal.

Paul Miller, an analyst at FBR Capital Markets Corp, said regulators may compel as many as 14 of the nation's 19 largest banks to raise common equity based on the financial stress tests. Miller, a former bank examiner, said his estimate assumes regulators will require banks to maintain tangible common equity, one of the most conservative measures of capital, equal to 4 per cent of their risk-weighted assets over the next two years, to withstand losses in case the recession worsens.

"When you start talking about 4 per cent on risk-weighted assets based on the stress test two years out, most banks will be required to raise more capital," Miller said.

"I believe it will be as high as 14."

He declined to name them.

Citigroup, which has already taken $45 billion in US taxpayer funds to shore up its finances, may need to raise as much as $10 billion in new capital, The Wall Street Journal reported on Friday, citing people familiar with the matter.


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